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Zombie Capitalism 

Global Crisis and the Relevance of Marx 

Zombie Capitalism 

Zombie Capitalism 

Global Crisis and the Relevance of Marx 

Chris Harman 

Haymarket Books 
Chicago, Illinois 

First published in July 2009 by Bookmarks Publications. 
Copyright © Bookmarks Publications. 

This edition published in 2010 by Haymarket Books 

P.O. Box 180165 

Chicago, IL 60618 


www. haymarketbooks. org 

info@haymarketbooks. org 

ISBN: 978-1-60846-104-2 

Trade distribution: 

In the U.S., Consortium Book Sales, 

In Canada, Publishers Group Canada, 

In Australia, Palgrave MacMillan, 

All other countries, Publishers Group Worldwide, 

Cover design by Josh On. 

This book was published with the generous support of Lannan Foundation and 
the Wallace Global Fund. 

Library of Congress Cataloging in Publication data is available. 

10 987654321 


Introduction 7 
Part One: Understanding the System: Marx and Beyond 

1 Marx's Concepts 21 

2 Marx and His Critics 41 

3 The Dynamics of the System 55 

4 Beyond Marx: Monopoly, War and the State 87 

5 State Spending and the System 121 

Part Two: Capitalism in the 20th Century 

6 The Great Slump 143 

7 The Long Boom 161 

8 The End of the Golden Age 191 

Part Three: The New Age of Global Instability 

9 The Years of Delusion 229 

10 Global Capital in the New Age 255 

11 Financialisation and the Bubbles That Burst 277 

Part Four: The Runaway System 

12 The New Limits of Capital 307 

13 The Runaway System and the Future for Humanity 325 

14 Who Can Overcome? 329 

Notes 353 

Glossary 394 

Index 403 

About the Author 

Chris Harman is a leading member of the Socialist Workers Party 
( He is the author of numerous books including 
A Peoples History of the World (Bookmarks 1999 and Verso 
2008), Revolution in the 21st Century (Bookmarks 2007), The 
Fire Last Time: 1968 and After (Bookmarks 1988), The Lost 
Revolution: Germany 1918 to 1923 (Bookmarks 1982). He is the 
editor of International Socialism, a quarterly journal of Marxist 
theory ( 

The Socialist Workers Party is linked to an international network 
of organisations, for further information go to 


An unstable world 

We live in an unstable world, and the instability is going to increase. 
It is a world where a billion people feel hungry every day, and the 
hunger is going to increase. It is a world which is destroying its own 
environment, and the destruction is going to increase. It is a violent 
world, and the violence is going to increase. It is a world where 
people are less happy, even in the industrially advanced countries, 
than they used to be, 1 and the unhappiness is going to increase. 

Even the most craven apologists for capitalism find it hard to 
deny this reality any longer, as the worst economic crisis since the 
Second World War continues to deepen as I write. 

The world's best known banks have only been saved from going 
bust by vast government bail-outs. Thousands of factories, stores 
and offices are closing across Europe and North America. 
Unemployment is shooting upwards. Twenty million Chinese 
workers have been told they have to return to the villages because 
there are no jobs for them in the cities. An Indian employers' think 
tank warns that ten million of their employees face the sack. A 
hundred million of the world's people in the Global South are still 
threatened with hunger because of last year's doubling of grain 
prices, while in the richest country in the world, the United States, 
three million families have been dispossessed from their homes in 
18 months. 

Yet just two years ago, when I began this book, the message was 
very different: "Recent high levels of growth will continue, global 
inflation will stay quite subdued, and global current account im- 
balances will gradually moderate," was the "consensus" among 
mainstream economists, reported the Bank of International 
Settlements. The politicians, industrialists, financiers and com- 
mentators all agreed. They toasted the wonders of free markets 


and rejoiced that "entrepreneurial genius" had been liberated 
from regulation. It was wonderful, they told us, that the rich were 
getting richer because that provided the incentives which made the 
system so bountiful. 

Trade was going to obliterate hunger in Africa. Economic 
growth was draining the vast pools of poverty in Asia. The crises of 
the 1970s, 80s, 90s and 2001-2 were memories we could put 
behind us. There might be horrors in the world, wars in the Middle 
East, civil wars in Africa, but these were to be blamed on the short- 
sightedness of essentially honest politicians in Washington and 
London who may have made mistakes but whose humanitarian in- 
tervention was still needed to deal with psychopathic maniacs. The 
words of those who saw things differently were ignored, as the 
media poured out candyfloss layers of celebrity culture, upper 
middle class self-congratulation and senseless nationalist euphoria 
over sporting events. 

Then in mid-August 2007 something happened which began to 
sweep the candyfloss away to provide a glimpse of the underlying 
reality. A number of banks suddenly discovered they could not bal- 
ance their books and stopped lending to each other. The world's 
financial system began grinding to a halt with a credit crunch that 
turned into a crash of the whole system in October 2008. 
Capitalist complacency turned to capitalist panic, euphoria to des- 
peration. Yesterday's heroes became today's swindlers. From those 
who had assured us of the wonders of the system there now came 
one message: "We don't know what has gone wrong and we don't 
know what to do." The man who not long before had been treated 
as the supreme genius overseeing the US economic system, Alan 
Greenspan, of the Federal Reserve, admitted to the US Congress 
that he still did "not fully understand what went wrong in what he 
thought were self-governing markets". 2 

Governments have been throwing hundreds of billions to those 
who run the banks — and tens of billions to those who run the 
multinational car firms — in the hope that this will somehow stop 
the crisis. But they cannot agree among themselves how to do this 
and even whether it will work or not. 

Yet one thing is certain. The moment any part of the global 
economy begins to stabilise they will forget the hundreds of mil- 
lions of lives that have been shattered by the crisis. A few months 
when banks are not collapsing and profits are not falling through 
the floor and the apologists will be pumping out candyfloss once 



again. Their futures will seem better and they will generalise this 
to the world at large with renewed talk about the wonders of cap- 
italism and the impossibility of any alternative — until crisis hits 
again and throws them into another panic. 

But crises are not some new feature of the system. They have oc- 
curred at longer or shorter intervals ever since the industrial 
revolution established the modern form of capitalism in Britain 
fully at the beginning of the 19th century. 

The poverty of economics 

The mainstream economics that is taught in schools and universi- 
ties has proved completely unable to come to terms with such 
things. The Bank of International Settlements recognises that: 

Virtually no one foresaw the Great Depression of the 1930s, or 
the crises which affected Japan and South East Asia in the early 
and late 1990s, respectively. In fact, each downturn was pre- 
ceded by a period of non-inflationary growth exuberant 
enough to lead many commentators to suggest that a "new 
era" had arrived. 3 

Nothing sums up the incomprehension of those who defend capi- 
talism as much as their inability to explain the most significant 
economic episode in the 20th century — the slump of the 1930s. 
Ben Bernanke, the present head of the US Federal Reserve and sup- 
posedly one of mainstream economics' most respected experts on 
economic crises, admits that "understanding the Great Depression 
is the Holy Grail of macroeconomics" 4 — in other words, he can 
find no explanation for it. Nobel economic laureate Edward C 
Prescott describes it as "a... pathological episode and it defies ex- 
planation by standard economics". 5 For Robert Lucas, another 
Nobel Laureate "it takes a real effort of will to admit you don't 
know what the hell is going on in some areas". 6 

These are not accidental failings. They are built into the very as- 
sumptions of the "neoclassical" or "marginalist" school that has 
dominated mainstream economics for a century and a quarter. Its 
founders set themselves the task of showing how markets 
"clear" — that is, how all the goods in them will find buyers. But 
that assumes in advance that crises are not possible. 



The implausibility of the neoclassical model in the face of some 
of the most obvious features of capitalism has led to recurrent at- 
tempts within the mainstream to bolt extra elements onto it in an 
ad hoc way. None of these additions, however, alter the basic belief 
that the system will return to equilibrium — providing prices, and 
especially wages, adjust to market pressures without hindrance. 
Even John Maynard Keynes, who went further than anyone else in 
the mainstream in questioning the equilibrium model, still assumed 
it could be made to work with a degree of government intervention. 

There were always challenges to such complacency. The 
Austrian economist Joseph Schumpeter derided any idea of equi- 
librium as incompatible with what he saw as the great positive 
virtue of capitalism, its dynamism. Some of Keynes's disciples went 
much further than he did in breaking with neoclassical orthodoxy. 
Cambridge economists tore apart the theoretical basis of the neo- 
classical school. Yet the orthodoxy is as strongly entrenched in the 
universities and schools as ever, pumping into the heads of each 
new generation a picture of the economic system that bears little 
relationship to reality. The pressure on students to study the books 
putting forward such views as if they were scientific texts has led 
to Paul Samuelson's Economics and Lipsey's An Introduction to 
Positive Economics selling millions of copies. 

It is hardly surprising that the economics profession has diffi- 
culty coming to terms with those aspects of the capitalist system 
that have the greatest impact on the mass of people who live within 
it. The obtuse theorems that fill economic textbooks and academic 
journals, with their successive algebraic calculations and geometric 
figures, assume stability and equilibrium, and so have little to say to 
people worried by the system's propensity to crisis. One of the 
founders of the neoclassical school, Alfred Marshall, observed 
nearly a century ago that the economic theory he believed in was of 
little use in practice and that "a man is likely to be a better econo- 
mist if he trusts his common sense and practical instincts". 7 

Yet what is involved is not just abstract academic scholasticism. 
The orthodoxy is an ideological product in the sense that it oper- 
ates from the standpoint of those who profit from the market 
system. It presents their profiteering as the supreme way of con- 
tributing to the common good, while absolving them of anything 
that goes wrong. And it rules out any fundamental critique of the 
present system, in a way that suits those with commanding posi- 
tions in educational structures, connected as they are to all the 



other structures of capitalism. The radical Keynesian Joan 
Robinson summed up the situation: 

The radicals have the easier case to make. They have only to 
point to the discrepancies between the operation of the modern 
economy and the ideas by which it is supposed to be judged, 
while the conservatives have the well nigh impossible task of 
demonstrating that this is the best of all possible worlds. For the 
same reason, however, the conservatives are compensated by 
occupying positions of power, which they can use to keep criti- 
cism in check... The conservatives do not feel obliged to answer 
radical criticisms on their merits and the argument is never 
fairly joined. 8 

But even most of the "radicals" usually start by taking the exist- 
ing system for granted. The arguments of the radical Keynesians 
like Joan Robinson have always been in terms of amendments to 
the system, through greater state intervention than that envisaged 
by the mainstream. They have not seen the system itself as driven 
by an inner dynamic whose destructive effects are not restricted to 
purely economic phenomena. In the 21st century it is producing 
wars, hunger and climate change as well as economic crises, and 
doing so in ways which threatens the very basis of human life. 

Capitalism transforms society in its entirety as its sucks people 
by the billions into labouring for it. It changes the whole pattern 
by which humanity lives, remoulding human nature itself. It gives 
a new character to old oppressions and throws up completely new 
ones. It creates drives to war and ecological destruction. It seems 
to act like a force of nature, creating chaos and devastation on a 
scale much greater than any earthquake, hurricane or tsunami. 
Yet the system is not a product of nature, but of human activity, 
human activity that has somehow escaped from human control 
and taken on a life of its own. Economists write that "the market 
does this" or "the market demands that". But the market is only 
the coming together of the products of many disparate acts of 
human creative activity, labour. What the economists' talk dis- 
guises is that somehow these have turned into a machine that 
dominates the humans that undertake such activity, hurling the 
world in a direction that few people in their right mind would 
want. Faced with the financial crisis that began in 2007, some 
economic commentators did begin to talk of "zombie banks" — 



financial institutions that were in the "undead state" and inca- 
pable of fulfilling any positive function, but representing a threat 
to everything else. 9 What they do not recognise is that 21st cen- 
tury capitalism as a whole is a zombie system, seemingly dead 
when it comes to achieving human goals and responding to 
human feelings, but capable of sudden spurts of activity that 
cause chaos all around. 

A world turned against ourselves 

There has only been one serious tradition of analysis to attempt to 
provide an account of the system in these terms. It is that which 
originated in the writings of Karl Marx and his long-time col- 
league Frederick Engels. 

Marx came to adulthood in the early 1840s, just as industrial 
capitalism began to make its first, limited, impact on southern 
Germany where he was born. Engels was sent by his father to help 
manage a factory in Manchester, where the new system was al- 
ready flourishing. They shared with almost the whole of their 
generation of German intellectual youth a desire to overthrow the 
oppressive Prussian feudal system of class rule presided over by a 
monarch with despotic powers. But they soon began to grasp that 
the industrial capitalism that was supplementing feudalism con- 
tained oppressive features of its own. Above all it was 
characterised by an inhuman subordination of the mass of people 
to the work they did. What Marx was beginning to discover about 
the functioning of this then-new system led him to undertake a 
critical reading of its most eminent proponents, political econo- 
mists like Adam Smith and David Ricardo. His conclusion was 
that, although the system vastly increased the amount of wealth 
humans could produce, it also denied the majority of them the 
benefits of this wealth: 

The more the worker produces, the less he has to consume. The 
more values he creates, the more valueless, the more unworthy 
he becomes... [The system] replaces labour by machines, but it 
throws one section of workers back to a barbarous type of 
labour, and it turns the other section into a machine... It pro- 
duces intelligence — but for the worker, stupidity... It is true that 
labour produces wonderful things for the rich — but for the 



worker it produces privation. It produces palaces — but for the 
worker, hovels. It produces beauty — but for the worker, defor- 
mity... The worker only feels himself outside his work, and in 
his work feels outside himself. He feels at home when he is not 
working; when he is working he does not feel at home. 

In his early writings Marx called what was happening "alienation", 
taking up a philosophical term developed by the philosopher Georg 
Wilhelm Frederich Hegel. Marx's contemporary Ludwig Feuerbach 
had used the term to describe religion. It was, he argued, a human 
creation that people had allowed to dominate their lives. Marx now 
saw capitalism in the same way. It was human labour that produced 
new wealth. But under capitalism that wealth was turned into a 
monster dominating them, demanding to be fed by ever more labour. 

The object that labour produces, its product, stands opposed to 
it as something alien, as a power independent of the producer. 
The more the worker exerts himself in his work, the more pow- 
erful the alien, objective world becomes which he brings into 
being over against himself, the poorer he and his inner world 
become, and the less they belong to him... The worker places 
his life in the object; but now it no longer belongs to him, but 
to the object... 10 

As Marx put it in his notebooks for Capital in the early 1860s: 

The rule of the capitalist over the worker is the rule of the object 
over the human, of dead labour over living, of the product over 
the producer, since in fact the commodities which become the 
means of domination over the worker are... the products of the 
production process... It is the alienation process of his own 
social labour. 11 

But Marx did not simply record this state of affairs. Others had 
done so before him, and many were to continue to do so long after 
he was dead. He also set out, through a quarter of a century of 
grinding intellectual labour, to try to understand how the system 
had come into being and how it created forces opposed to itself. 

His works were not just works of economics, but a "critique of 
political economy", of the system which other schools of econom- 
ics took for granted. His starting point was that capitalism is a 



historical product, arriving where he found it as a result of a dy- 
namic which drove it ever onwards in a process of endless change 
with "constant revolutionising of production, uninterrupted dis- 
turbance of all social conditions, everlasting uncertainty and 
agitation". 12 The economic studies of the mature Marx aimed to 
grasp the nature of this dynamic, and with it the trends in the devel- 
opment of the system. They are the indispensable starting point for 
anyone who wants to try to grasp where the world is going today. 

His method was to analyse the system at different levels of ab- 
straction. In the first volume of Capital he set out to delineate the 
most general underlying features of capitalist production. The 
second volume 13 deals with the way in which capital, commodities 
and money circulate within the system, and the third volume 14 in- 
tegrates the process of production and circulation to provide more 
concrete accounts of things like profit rates, the crisis, the credit 
system and rent. Marx's original intention had been to produce 
further volumes, dealing among other things with the state, for- 
eign trade and world markets. He was unable to complete these, 
although some of his work towards them is contained in various 
notebooks by him. 15 Capital was, then, an unfinished work in 
some respects. But it was an unfinished work that accomplished 
the goal of unveiling the basic processes of the system, integrating 
into its account the very things ignored by the static equilibrium 
analysis of the neoclassical mainstream: technical advance, accu- 
mulation, recurrent crises and the growth of poverty alongside the 
growth of wealth. 

Using Marx today 

For these reasons, any account of the world system today has to 
begin with basic concepts developed by Marx. I try to outline these 
in the first three chapters of this book. Some readers from a 
Marxist background might regard the account as redundant. But 
the concepts have often been misunderstood within the Marxist 
camp as well as outside it. They have been seen as competing with 
the neoclassical to provide an equilibrium account of price forma- 
tion and then faulted for failing to do so. 16 

One reaction has been to drop key elements in Marx's own 
analysis, keeping it only as an account of exploitation and of the 
anarchy of competition. Another, apparently opposed, reaction 



has been an almost scholastic approach in which competing inter- 
pretations pore over texts by Marx and Hegel. It is often as if 
Marxist theory had been ambushed by its opponents and retreated 
into a theoretical bunker of its own, just as detached as they are 
from the real world. For this reason I have felt it necessary to ex- 
pound the basic concepts in a way which is (I hope) easy to follow, 
showing how they describe the interaction of the underlying forces 
that determine the direction of capitalist development. I have left 
detailed discussion of other interpretations to footnotes. I have, 
however, felt it necessary to deal with the most common objections 
to Marx's account from mainstream economists in Chapter Two, 
since anyone who studies economics at school or university will 
have their views inflicted on them. Readers who have been lucky 
enough to escape that fate are welcome to skip this chapter. 

Where the incompleteness of Marx's own account does matter 
is in coming to terms with changes in capitalism since his death. 
Things he only refers to in passing in Capital — the growth of mo- 
nopolies, the intervention by states in capitalist production and 
markets, the provision of welfare services, war as an economic 
weapon — have become massively important. Marxists in the first 
decades of the 20th century were forced by circumstances to 
debate some of these matters, and there was a new burst of cre- 
ative thinking in the 1960s and early 1970s. I attempt to draw 
from such discussions the concepts needed to "go beyond Capital" 
and fill in gaps in Marx's own account of the system (Chapters 
Four and Five). The rest of the book then tries to come to terms 
with the development of capitalism over the last 80 years, from the 
great slump of the inter-war years to the crisis causing turmoil 
across the world as I write. The account must be not simply one of 
economic processes, but at every stage of how the interaction of 
capitals and states on a world scale gives rise to wars and civil 
wars, hunger and environmental disaster, as well as booms and 
slumps. Nuclear weapons and greenhouse gases are as much a 
product of alienated labour as car factories and coal mines. 

A note on the book 

The instability of the capitalist economy has had its impact on the 
writing of this book. I set about writing the first draft when what I 
call "the great delusion" — the belief that the capitalism had found 



a new way of expanding without crises — was at its height in late 
2006. I viewed another economic crisis as inevitable, in much the 
same way that someone living in a city built on a seismic fault line 
knows it is at some point going to suffer an earthquake. But I did 
not pretend to be able to predict when this would happen, or how 
destructive it would be. My aim, rather, was to update my 
Explaining the Crisis of 25 years ago, taking into account changes 
in the system since, but repeating the basic conclusion that its blind 
rush forward would have devastating repercussions for people's 
lives through the rest of this century, creating immense social and 
political crises with potentially revolutionary implications. 

But one of these blind rushes had its effect as I was finishing a 
150,000-word draft. The credit crunch of August 2007 turned 
into the great crash of September-October 2008, leading one apol- 
ogist for the system, Willem Buiter, to write of "the end of 
capitalism as we knew it". 17 Many details about the system which 
I treated as part of the present were suddenly in the past, and 
everywhere there was an urgent demand for an explanation as to 
what brought this crisis about. I had no choice but to update and 
restructure what I had written, shifting the emphasis in some of 
the chapters towards the end of the book from what was going to 
happen over the decades to come, to what was happening in the 
here and now. In the process I cut about a third of the words out of 
the draft, removing a good deal of empirical detail in an effort to 
make the whole book more accessible. Anyone interested in 
greater detail can find some in the 15 articles on economics I have 
written for the journal International Socialism over the last two 
decades, while some of the theoretical arguments are articulated 
more fully in Explaining the Crisis. 


I owe thanks for reading and making comments on my excessively 
long and disorganised draft to Tobias Brink, Joseph Choonara, 
Alex Callinicos, Neil Davidson, Jane Hardy, Mike Haynes, Rick 
Kuhn, Matt Nichter and Mark Thomas. Thanks are also due for 
comments on some of the preparatory material that appeared in 
International Socialism to Tom Bramble, Sam Friedman, Mehmet 
Ufuk Tutan, Thomas Weiss and others, and for information on 
profit rates to Robert Brenner and Andrew Kliman. I also have a 



huge intellectual debt to many other people. Pride of place goes to 
what I learnt in my youth from Mike Kidron and Tony Cliff. Along 
with that there has been the stimulus over the years from the works 
of dozens of others who have maintained the tradition of Marxist 
economic analysis from the late 1960s to the present — Riccardo 
Belloflore, Henry Bernstein, Dick Bryan, Terry Byers, Guglielmo 
Carchedi, Francois Chesnais, Gerard Dumenil, Alfredo Saad Filho, 
Ben Fine, John Bellamy Foster, Alan Freeman, David Harvey, Peter 
Gowan, Claudio Katz, Jim Kincaid, Costas Lapavitsas, Istvan 
Meszaros, Fred Moseley, Geert Reuten, Anwar Shaikh, and many 
others. Some I have been able to listen to and converse with, most I 
have never met, and a few I disagree with strongly. But all in one 
way or another have helped shape my conclusions. 

A note on figures and terms 

Anyone attempting to explain economic changes has little choice but 
to use the statistical information provided by governments, business 
organisations and international institutions like the Organization of 
Economic Cooperation and Development (OECD), the United 
Nations Conference on Trade and Development (UNCTAD), the 
World Trade Organisation (WTO), the World Bank and the 
International Monetary Fund (IMF). This book is no exception. But 
readers should be warned that some of the most commonly used fig- 
ures can be misleading in important respects. 

Figures for economic growth, in particular, are not as clear cut as 
they sometimes seem. The growth they usually measure is of mar- 
keted output. But a lot of the human labour that adds to people's 
well-being is not marketed. This is true of the domestic labour of 
women and, to a considerably lesser extent, men. It has also been 
true historically of much of the family labour on peasant land. The 
result is that there is a false impression of increasing wealth as house- 
holds begin to pay for things they used to produce outside the 
market — when a housewife gets a job and buys ready to cook meals, 
or when a peasant family pays someone else to build a shed on their 
land where previously they would have done the job themselves. 

Such changes lead the usually provided figures to give an in- 
creasingly distorted picture with growing marketisation and the 
feminisation of paid labour in recent decades. The officially pro- 
vided figures also exaggerate the real rate of growth of the things 



that satisfy human need by counting in output things like financial 
services which merely move wealth from one pocket to another — 
again a particularly marked phenomenon in recent decades. 18 
Finally measurements of output per head cannot be equated, as 
they are all too frequently, with human welfare, since the output is 
always unevenly distributed between classes. Nevertheless, for 
want of anything better, I have had to use such figures. 

A brief explanation of some of the terms I use. Generally 
"West" and "East" are used in the way they were in the Cold War 
decades of the last century, with "the West" including Japan. 
"Third World" and "Global South" refer to the poorer parts of 
the world which were relatively unindustrialised for most of the 
20th century, as do the phrases "developing" or "underdeveloped 
countries" used with some of the statistics. The "Communist 
countries" are those with systems similar to that of the USSR 
before 1991. "Productive capital" is that employed in industry or 
agriculture, as opposed to that in finance and commerce. Finally, 
capitalists are assumed to be male, since 99.99 percent of them 
were until only a couple of decades ago, while the workers they ex- 
ploit have always been of both genders. I provide a glossary in an 
attempt to make the material more accessible both to those fortu- 
nate enough not to have studied mainstream economics and to 
those who are not yet familiar with Marxist writings. 



Part One 



Marx's Concepts 

A world of commodities 

The most obvious feature of the economic system in which we live 
is that it is centred around the buying and selling of goods of all 
sorts. We have to pay for food, shelter, clothing, energy to light 
and heat our homes, transport to move around, everything we 
need to keep ourselves and our families alive. And in order to buy 
we have to sell, even if all we have to sell is our capacity to work 
for others. Our very lives depend on the movements of commodi- 
ties. Hence Marx's starting point in Capital: 

The wealth of those societies in which the capitalist mode of 
production prevails, presents itself as an immense accumulation 
of commodities. 

Marx was writing at a time when market relations had still not 
penetrated large parts of the world. There were still societies in 
which all production was for people's immediate needs, whether 
in "primitive communist" societies based on hunter-gathering or 
light agriculture, 1 where people agreed freely among themselves 
how and what to produce, or in peasant societies where a local 
lord or ruler dictated to them from above. Even in most of the so- 
cieties where the market already existed, the majority of the 
population were still subsistence farmers, producing most of the 
things they needed to keep their families alive, with only a small 
proportion bought or sold. Today we can extend Marx's words to 
say that "the wealth of the whole world, with a few exceptions, 
presents itself as a mass of commodities". And the exceptions — 
the provision, for instance, of free health and education in a 
number of advanced countries — are increasingly subject to forces 
seeking to commodify them. This near universality of commodity 


production marks society today off from anything that has ever 
happened before. To understand what is happening to the world 
we have to begin by understanding the workings of commodity 

Marx was not the first to try to understand such workings. He 
was preceded by the classical political economists — early support- 
ers of capitalism who tried to understand its basic dynamics as it 
struggled to break through, in a Europe still dominated by 
landowning classes. Two were of special importance: Adam Smith, 
who wrote in the 1770s at the time when the first modern factory, 
a spinning mill, was opening at Cromford in Derbyshire; and 
David Ricardo, who defended the interests of the early industrial- 
ists against the big landowners 40 years later in the aftermath of 
the Napoleonic wars. 

Use value and exchange value 

Smith is often treated as the patron saint of present day capitalism 
and of its neoclassical economic theorists. But he made an impor- 
tant point, developed further by Ricardo, which has been 
completely obliterated by nearly all those mainstream economists 
who claim to follow in his footsteps. He noted that once society is 
based on production for the market, every commodity can be seen 
from two completely different points of view: 

The word value... has two different meanings, and sometimes 
expresses the utility of some particular object, and sometimes 
the power of purchasing other goods which the possession of 
that object conveys. The one may be called "value in use"; the 
other, "value in exchange". The things which have the greatest 
value in use have frequently little or no value in exchange; and 
on the contrary, those which have the greatest value in exchange 
have frequently little or no value in use. Nothing is more useful 
than water: but it will purchase scarce any thing; scarce any 
thing can be had in exchange for it. A diamond, on the contrary, 
has scarce any value in use; but a very great quantity of other 
goods may frequently be had in exchange for it. 2 

Marx's Capital took up and developed this insight, removing cer- 
tain ambiguities found in Smith's work: 


Understanding the System: Marx and Beyond 

The utility of a thing makes it a use value... Being limited by 
the physical properties of the commodity, it has no existence 
apart from that commodity. A commodity, such as iron, corn, 
or a diamond, is therefore, so far as it is a material thing, a use 
value, something useful. This property of a commodity is inde- 
pendent of the amount of labour required to appropriate its 
useful qualities. 

But commodities are also: 

the material depositories of exchange value [which] presents 
itself as a quantitative relation, as the proportion in which 
values in use of one sort are exchanged for those of another 
sort, a relation constantly changing with time and place. 3 

This distinction is not made by today's mainstream neoclassical 
economists. 4 The only sort of value they see is "marginal utility", 
based on people's subjective appreciation of use values. Nor is it 
made by some of those dissident economists who claim to be in the 
tradition of Ricardo (the so-called "Srafflans"). 5 Their model is 
based on the inputs and outputs of physical objects, in other words, 
again on use values. Finally there are some present day Marxists 
who argue the distinction is not relevant, since the important point 
Marx was making was about exploitation, not value. 6 

In erasing the distinction made by Smith, Ricardo and Marx, all 
such theories miss something essential to a system based on com- 
modity production: everything that happens in it is subject to two 
different sets of scientific laws. 

On the one side there are the laws of the physical world — of 
physics, chemistry, biology, geology and so on. It is these which 
determine the ways in which different things have to be combined 
to produce goods (the different components of a machine, the ma- 
terial structure of a factory, the techniques used in a surgical 
operation and so on) and also the usefulness of those goods to 
those who finally consume them (the nutritional value of food, 
the warmth provided by fuels and electricity, the number of chil- 
dren who can be accommodated in a school or patients in a 
hospital, etc). 

On the other side, there is the way things relate to each other as 
exchange values. These often behave in a very different way to use 
values. The exchange value of something can fall while its use 

Marx's Concepts 


value remains unaltered. This has happened to the price of com- 
puters in recent years — the computer I used to write my last book 
was twice the price of the much more powerful one I am using 
now. What is more, exchange values are infinitely divisible while 
use values are usually not; you might say that a bicycle is worth 
one twentieth of a car, but if you cut a car up into twenty parts it is 
of nil use to anyone. This matters immensely when it comes to 
things which are important for modern capitalism like factories, 
oil wells, airliners, schools and hospitals. The market treats these 
as exchange values that can be infinitely divided into parts (worth 
so many pounds, pence, etc); but they have a physical existence 
that cannot usually be divided in that way. 

The exchange values of commodities are also infinitely fluid. In 
the form of money they can move from one part of the economy to 
another, from one part of the world to another, be spent on one 
item or any other of the same price. But the fluidity of use values, 
like their divisibility, is restricted by their physical make up. You 
can move £100 million in cash from Britain to India overnight, but 
you cannot move a factory worth £100 million at anything like the 
same speed. Use values and exchange values operate according to 
different, often contradictory, logics and a failure to see this leads 
to a failure to understand the most basic thing about a commodity 
producing economy. It does not operate smoothly, just through the 
flow of exchange values, but is always subject to bumps, to stop- 
ping and starting, due to the embodiment of exchange values in 
use values with physical properties that limit their fluidity. 

Labour and money 

Smith and Ricardo were not content just with seeing the double 
nature of commodities. They went on to argue that it was only 
possible to ascribe exchange values to objects with very different 
physical properties because they have one thing in common — they 
are all products of human labour. 
As Smith wrote: 

The real price of every thing, what every thing really costs to the 
man who wants to acquire it, is the toil and trouble of acquiring 
it. What every thing is really worth to the man who has ac- 
quired it, and who wants to dispose of it or exchange it for 


Understanding the System: Marx and Beyond 

something else, is the toil and trouble which it can save to him- 
self, and which it can impose upon other people. What is 
bought with money or with goods is purchased by labour, as 
much as what we acquire by the toil of our own body... They 
contain the value of a certain quantity of labour which we ex- 
change for what is supposed at the time to contain the value of 
an equal quantity. 

Labour was the first price, the original purchase-money that 
was paid for all things. It was not by gold or by silver, but by 
labour, that all the wealth of the world was originally purchased; 
and its value, to those who possess it, and who want to exchange 
it for some new productions, is precisely equal to the quantity of 
labour which it can enable them to purchase or command. 7 

This understanding Marx also incorporated into his own analysis: 

The exchange values of commodities must be capable of being 
expressed in terms of something common to them all, of which 
thing they represent a greater or less quantity. This common 
"something" cannot be a geometrical, a chemical, or any other 
natural property of commodities... If then we leave out of con- 
sideration the use value of commodities, they have only one 
common property left, that of being products of labour. 

But Marx refined the analysis of Smith and Ricardo in a very im- 
portant way. It was not the particular concrete exertions of labour 
as such that determined exchange value. For different people with 
different skills take different amounts of time and use different 
amounts of effort to produce particular commodities: 

Some people might think that if the value of a commodity is de- 
termined by the quantity of labour spent on it, the more idle and 
unskilful the labourer, the more valuable would his commodity 
be, because more time would be required in its production. 8 

Rather the exchange value of a commodity depends on the "so- 
cially necessary labour time": 

that is required to produce an article under the normal condi- 
tions of production, and with the average degree of skill and 
intensity prevalent at the time... 9 

Marx's Concepts 


It is social labour that has transformed nature to create the means 
that humans depend on for a livelihood. So it is the amount of social 
labour incorporated in it that constitutes the underlying value of a 
commodity. The concrete labour of individuals is transformed 
through exchange in a commodity-producing society into a propor- 
tionate 10 part of "homogenous", "social" labour — or "abstract 
labour". Marx calls this abstract labour the "substance of value". It 
finds expression in exchange value and determines the level around 
which the commodity's price will fluctuate on the market: 

Every child knows that any nation that stopped working, not 
for a year, but let us say, just for a few weeks, would perish. And 
every child knows, too, that the amounts of products corre- 
sponding to the differing amounts of needs demand differing 
and quantitatively determined amounts of society's aggregate 
labour... And the form in which this proportional distribution 
of labour asserts itself in a state of society in which the inter- 
connection of social labour expresses itself as the private 
exchange of the individual products of labour, is precisely the 
exchange value of these products. 11 All the different kinds of pri- 
vate labour, which are carried on independently of each 
other... are continually being reduced to the quantitative pro- 
portions in which society requires them. 12 

Neoclassical economists tried to develop a notion of value out of 
people's subjective judgements, with some even trying to incorpo- 
rate labour as "disutility". Marx, by contrast, saw value as 
something objective, as indicating the proportion of total social 
labour "embodied" 13 in it. But what that value is only comes to 
light as a result of the continual, blind, interaction of commodities 
on the market. 14 The system as a whole forces its individual com- 
ponents to worry about how the individual labour they employ 
relates to labour elsewhere. 15 He calls this process the operation of 
"the law of value". 

Values, however, are not unchanging. All the time there is the 
introduction of new techniques or new methods somewhere in the 
system. This results in a change in the amount of socially necessary 
labour needed to produce certain commodities — and that changes 
their exchange value. The use values of objects remain fixed until 
natural processes of wear, tear and decay damage them. But the 
exchange value of things — the value that matters for the system as 


Understanding the System: Marx and Beyond 

a whole — declines every time the technical advance somewhere in 
the system decreases the amount of labour required to make them. 

This leads Marx to a "counter-intuitive" conclusion which dis- 
tinguishes his account of the system — and it is one which even 
some Marxists have difficulties coming to terms with. A rise in 
productivity reduces the value at which things exchange. It seems 
absurd on the face of it. Yet there are numerous examples of in- 
creased productivity causing some goods to fall in price compared 
to others. Marx provided one from his own time: 

The introduction of power-looms into England probably re- 
duced by one-half the labour required to weave a given quantity 
of yarn into cloth. The hand-loom weavers, as a matter of fact, 
continued to require the same time as before; but for all that, 
the product of one hour of their labour represented after the 
change only half an hour's social labour and consequently fell 
to one-half its former value. 16 

Thousands more examples could be given today. For we are living 
in a period in which technical advance is much faster in some in- 
dustries (especially those involving microprocessors) than others, 
and so the prices of things like DVDs, televisions and computers 
produced by industries using the most technologically advanced 
equipment are tending to fall while those in other industries using 
older techniques remain fixed or tend to rise. This is something of 
central importance as we shall see later when we discuss the dy- 
namics of 21st century capitalism. 

Once commodity production is generalised across a society, 
one particular good comes to be used to represent the value of all 
others — money (Marx calls it "the universal equivalent"). In 
Marx's day it was usually in the form of gold (or sometimes 
silver), and a certain quantity of gold (say an ounce), produced by 
a certain amount of average labour time, could act as a measure 
of the value for all the other goods that were bought and sold. As 
capitalism developed as a system, banks and then governments 
found that they could use paper notes to stand in for gold in many 
transactions and eventually to dispense with reliance on it at all, 
so long as people believed others would accept those notes 
(known technically as "fiat money") for goods. Credit from 
banks could also function in the same way, so long as people con- 
tinued to trust the banks. 

Marx's Concepts 


The development of commodity production had one important 
effect. It systematically distorted people's understanding of reality 
through what Marx called the "fetishism of commodities": 

The... relation of the producers to the sum total of their own 
labour is presented to them as a social relation, existing not be- 
tween themselves, but between the products of their labour... A 
definite social relation between men assumes, in their eyes, the 
fantastic form of a relation between things. In order to find an 
analogy, we must have recourse to the mist-enveloped regions 
of the religious world. In that world the productions of the 
human brain appear as independent beings endowed with life, 
and entering into relation both with one another and the human 
race. So it is in the world of commodities with the products of 
men's hands. 17 

People speak of "the power of money", as if its power did not 
come from the human labour for which it is a token; or of the 
"needs of the market", as if the market was anything more than 
an arrangement for linking together the concrete acts of labour of 
different human beings. Such mystical attitudes lead people to as- 
cribe social ills to things beyond human control — the process 
which the young Marx had called "alienation" and which some 
Marxists since Marx have called "reification". Simply seeing 
through such mysticism does not in itself deal with the social ills. 
As Marx noted, simply arriving at a scientific understanding of the 
character of existing society leaves it intact just as "after the dis- 
covery of the component gases of air, the atmosphere itself 
remained unaltered". 18 But without seeing through the fetishism, 
conscious action to transform society cannot take place. Hence the 
importance of grasping the distinction between use value and ex- 
change value and of grounding value in socially necessary labour. 

Exploitation and surplus value 

We do not only live in a world of commodity production. We live in 
a world where control of most of that production is concentrated in 
relatively few hands. In 2008 the sales of the world's biggest 2,000 
companies equalled about half of total world output. 19 If we assume 
that around ten directors sit on the board of each of the multina- 


Understanding the System: Marx and Beyond 

tionals, then the out of a world population of over six billion, a mere 
20,000 people exercise decisive control over the creation of wealth; 
in fact, the figure will be considerably lower than that because most 
of the directors will sit on the boards of more than one firm. 
Production, of course, is not carried out simply by the multination- 
als. Alongside them are a mass of nationally based medium-sized 
firms that have not achieved multinational status, and alongside 
them exist an even larger number of small firms, some little more 
than family operations employing perhaps a couple of people. But, 
even taking all these into consideration, only a small percentage of 
the world's population control the means of production responsible 
for producing the major portion of its wealth. 

Those who do not own and control such means of production 
have no choice if they are to make a livelihood, beyond the mini- 
mum provided by welfare programmes, other than to try to sell 
their ability to work to those that do. They get paid a wage, while 
their labour produces goods that are the property of those who 
control the means of production. Some of the value of these goods 
is used to cover the wages of the workers, some to pay for the ma- 
terials used in production, some to cover the wear and tear of 
means of production. But some forms an excess which is the basis 
of the profits of the owners — what Marx called "surplus value" 
and some non-Marxist economists simply call "the surplus". 

Adam Smith had already suggested where this surplus came 
from (although he did not stick consistently to this view): 

In the original state of things, which precedes both the appro- 
priation of land and the accumulation of stock, the whole 
product of labour belonged to the labourer... But as soon as the 
land becomes private property, the landowner demands a share 
of the produce... The produce of almost all other labour is 
liable to the like deduction of profit. In all arts and manufac- 
tures the greater part of the workmen stand in need of a master 
to advance them the materials of their work, and their wages 
and maintenance till it be completed. He shares in the produce 
of their labour, or in the value which it adds to the materials 
upon which it is bestowed; and in this share consists his profit. 20 

Profit, then, arises when the land, tools and materials required for 
production become the private property of one section of society. 
This section is then able to get control of the labour of others. 

Marx's Concepts 


Ricardo took up and developed Smith's ideas. In doing so he 
pointed to a central ambiguity in Smith's own writings. Smith 
mixes with the view that labour alone creates value another ap- 
proach, in which profits and rent as well as labour contribute to the 
final value of goods. Ricardo rejected this latter view. But soon after 
his death in the 1820s it became the orthodoxy among pro-capital- 
ist economists. It was much more palatable to defenders of the 
existing system than implying that profits were parasitic on labour. 

Marx, however, saw that the development of Smith's views by 
Ricardo could alone provide the basis for a scientific account of 
how capitalism functioned. Like Ricardo, he recognised it was 
absurd to say that profits somehow created value when they were 
part of value that had already been created. But he went much fur- 
ther than Ricardo had in clarifying the issues and working out the 
implications of the theory. 

The first important advance he made was to differentiate clearly 
two different meanings given to "the value of labour" by Smith. 
On the one hand it meant the amount of labour required to keep 
the labourer for the time during which he or she worked. Adam 
Smith had argued: 

There is... a certain rate below which it seems impossible to 
reduce for any considerable time the ordinary wages of even the 
lower species of labour. A man must always live by his work, 
and his wages must at least be sufficient to maintain him. They 
must even upon most occasions be somewhat more otherwise it 
would be impossible for him to bring up a family, and the race 
of such workmen would not last beyond the first generation. 21 

From this point of view, the "value of labour" was the value of the 
wage of the labourer. 

But Smith also used the term "labour" to refer to the amount of 
labour actually performed by the worker. And, Marx stressed, the 
two amounts were by no means the same. Labour, he pointed out, 
was like all other commodities in that it was bought and sold. But it 
differed from them because it had the peculiar property that when 
put to use it performed more labour than required to produce it. 

In the 1850s he introduced a new term designed to make the 
distinction between the two uses of the concept of labour in Smith 
and Ricardo (and in his own earlier writings) absolutely clear. He 
said that what the capitalist paid for when he employed someone 


Understanding the System: Marx and Beyond 

was not labour as such but "labour power" — the ability of some- 
one to work for a certain period of time. The value of labour 
power depended, like that of any other commodity, on the amount 
of labour needed to produce it. Workers could not provide labour 
power unless they had adequate food, clothing, housing, a certain 
amount of relaxation, etc. These were their requirements if they 
were to be fit and capable of working. Their wage had to cover the 
cost of these things — that is, to correspond to the amount of social 
labour needed to produce them. This determined the value of 
labour power. 

It should be noted that Marx did not see the minimal level of 
subsistence alone as determining the value of labour power. There 
was also the need to make minimal provision for the upbringing of 
the workers' children, since they would constitute the next genera- 
tion of labour power. And there was a "historical and moral 
element" which depended on the "habits and degree of comfort" 
which the workers were accustomed to. Without it they would not 
apply their full faculties to their labour and might even rebel against 
it. In this way the cumulative effect of workers' struggles could in- 
fluence the value of labour power. Marx was not, as he is 
sometimes presented, a believer in an "iron law of wages" whereby 
only a fixed portion of national output could go to the workers. 22 

Be that as it may, the labour people could perform was greater 
than the amount of labour needed to provide them with at least a 
minimal livelihood — to replenish their labour power. It might, for 
instance, take an average of only four hours work a day to provide 
the level of consumption necessary for someone to be able to per- 
form a day's work. But they could then perform eight, nine or even 
ten hours work a day. The extra labour went to the employer, so 
that the value of the goods turned out by his factory was always 
greater than his investment. It was this which enabled him contin- 
ually to get surplus value, which he could keep for himself or pass 
on to other members of the capitalist class in the form of interest 
and rent. 

The relation between the employer and the worker had the ap- 
pearance of being between equals. The employer agreed to give the 
wage and the worker his or her labour. No coercion was involved. 
On the face of it the situation was very different to that between 
the slave owner and the slave, or between the feudal lord and the 
serf. It was compatible with a juridical system based on "the rights 
of man", of equality before the law of all citizens. Even if actually 

Marx's Concepts 


existing bourgeois societies were tardy in granting this, it seemed 
engraved on their structure. Yet the surface appearance of equality 
hid a deeper inequality. The employer possessed the prerequisites 
for the workers engaging in social production and getting a liveli- 
hood. The workers were "free" in the sense that they do not have 
to work for any individual firm or capitalist. But they could not 
escape having to try to work for someone. As Marx put it: 

the worker can leave the individual capitalist to whom he hires 
himself whenever he likes... But the worker, whose sole source 
of livelihood is the sale of his labour, cannot leave the whole 
class of purchasers, that is the capitalist class, without renounc- 
ing his existence. He belongs not to this or that bourgeois, but 
to the bourgeois class. 23 

The difference between the value of the worker's labour power 
and the value created by the labour done was the source of the 
surplus value. Once the employer had got this surplus value, it 
could be kept directly as profit, it could be used to pay off interest 
on any money borrowed to build the factory, or as rent to the 
owner of the land on which the factory stood. But however sur- 
plus value was divided up into profits, interest and rent, its source 
remained the excess work done by the workers — the exploitation 
by those who owned the means of production of those who did 
not. Once the owner had got the profit, he could use it to build 
new means of production, increasing still further his capacity to 
blackmail workers into labouring for him on his terms if they 
were to get a livelihood. 

It was this process which made the employer a capitalist. It also 
gave a special meaning to the word "capital". The word is used by 
mainstream economists and in everyday life simply to mean long- 
term investment as opposed to immediate consumption. But it has 
a deeper significance once the means of production are in the con- 
trol of one group of society, compelling others who want a 
livelihood to work for them. It is now a product of past labour 
which is able to expand through the exploitation of current labour. 
It is, as Marx put it, not a thing, but a relation: 

Value-creating and value-enhancing power belongs not to the 
worker but to the capitalist... All the development of the pro- 
ductive forces of labour is development of the productive forces 


Understanding the System: Marx and Beyond 

of capital. By incorporating into itself this power, capital comes 
alive and begins to work "as if its body were by love pos- 
sessed". Living labour thus becomes a means whereby 
objectified labour is preserved and increased... 24 

The fetishism of commodities now takes the form of making it 
seem that creativity does not lie with living human beings but with 
the products of their labour, so that people talk of capital creating 
wealth and employers "providing people with work", whereas in 
reality it is labour that adds to the value of capital and the worker 
who provides labour to the employer. 

Absolute and relative surplus value 

Marx distinguished between two ways in which firms could raise 
the ratio of surplus value to wages. One was by the crude method 
of lengthening the working day. He called this "absolute surplus 
value". This method of forcing up profits was very widespread in 
the early days of industrial capitalism, and Marx in Capital pro- 
vides many examples of it. But Marx also noted in Capital that 
prolonging the working day over much could be counterproduc- 
tive for the capitalist: 

A point must inevitably be reached, where extension of the 
working day and intensity of the labour mutually exclude one 
another, in such a way that lengthening of the working day be- 
comes compatible only with a lower degree of intensity. 25 

So it was that, after putting up massive opposition to successive at- 
tempts to provide a legal limit to the working day for children, 
major capitalist interests gave way to working class pressure — and 
sometimes found that production actually increased once hours 
were shorter. For much of the 20th century the method of pro- 
longing the working day seemed to belong to the past. In the 
advanced industrial countries, at least, workers' resistance had 
forced capitalists to concede a shorter working week and holidays 
with pay. The 72-hour week of Victorian times had become the 
48-hour week and then the 44-hour week. 

But there was another range of methods for increasing the 
amount of surplus value to be obtained from each worker, which 

Marx's Concepts 


Marx called "relative surplus value". It relied on reducing the pro- 
portion of the work time that went into covering the cost of 
replenishing worker's capacity to work, that is, their labour power. 

This took three forms. The first was to introduce new machinery 
into the workplace, so as to increase productivity and reduce the 
amount of time it took for the workers to produce goods whose 
sale would cover their wages. In effect, instead of, say, four hours 
work covering the cost of their labour power, two hours would do 
so — with two hours extra going to produce surplus value. 

Marx saw this as the method of increasing exploitation capital- 
ists turned to as they faced difficulties in extending the working 
week any further in the mid-1 9th century. The productivity of the 
workforce per hour became central, rather than extending the 
number of hours worked. 26 But it was in itself only a short-term 
expedient for the capitalist. The first capitalist to introduce new 
machinery would be able to produce the same amount of value 
with less hours of labour. Once other capitalists also introduced 
new machinery, the socially necessary time needed for production 
fell and with it the value of the goods he sold and the excess sur- 
plus value he obtained. 

The second form it took was increased productivity in the con- 
sumer goods industries and agriculture. This would reduce the 
amount of labour time needed to produce their output and the 
prices workers had to pay for their means of livelihood. This meant 
that the cost to the capitalists everywhere of providing workers 
with their accustomed living standard (of paying for their labour 
power) fell, and the amount of surplus value extracted could be in- 
creased without cutting real wages or extending the working day. 

The third method was to intensify the pressure on workers to 
work harder. As Marx puts it, the only way to "change the relative 
magnitudes" of the working day going to the capitalist rather than 
the worker without cutting real wages was to "change either the 
productivity of labour or its intensity". 27 There was a drive to 
impose "on the workman increased expenditure of labour in a 
given time, heightened tension of labour-power, and closer filling 
up of the pores of the working-day." 28 Or again, "What is lost by 
shortening the duration is gained by the increasing tension of 
labour power". 29 

The drive for increased productivity became an obsession for 
big business, as was shown by the movement for "scientific man- 
agement" founded by the American F W Taylor in the 1890s. 


Understanding the System: Marx and Beyond 

Taylor believed that every task done in industry could be broken 
down into individual components and timed, so as to determine 
the maximum which workers could accomplish. In this way, any 
breaks in the tempo of work could be eliminated, with Taylor 
claiming he could increase the amount of work done in a day by 
as much as 200 percent. 

"Taylorism" found its fullest expression with the introduction 
of the assembly line in Henry Ford's car plants. The speed at which 
people worked now depended on the speed at which the line 
moved, rather than their individual motivation. In other industries 
the same pressure on people to work flat out was achieved by in- 
creasing surveillance by supervisors, with, for instance, mechanical 
counters on machines indicating the level of work achieved. And 
today a similar approach is being attempted in a variety of white 
collar occupations with increased use of assessment, attempts at 
payment by results, the use of key stroke counters on computers, 
and so on. 

Accumulation and competition 

A world of commodity production is a world of competition be- 
tween producers. It is this element of competition which 
distinguishes a society based on commodity production and ex- 
change value from one where individuals or groups decide on 
what use values to produce for their own consumption. Through 
exchange the effort put in by those working in one unit of produc- 
tion is linked to those of millions of other individuals in other 
units, but the link only takes place through competition between 
those taking the decisions about production in the individual 
units. In Engels' phrase there is "social production but capitalist 
appropriation". 30 

The capitalist firm which exploits the worker is therefore, nec- 
essarily, in competition with other capitalist firms. If it cannot 
out-compete them, eventually it will be forced out of business. 
To out-compete means keeping ahead in developing new, more 
productive techniques — only in that way can it ensure that it is 
not going to be driven out of business by rivals producing and 
selling goods more cheaply than it can. It cannot guarantee being 
able to afford new equipment using such techniques unless its 
profits are as high as possible. But if it raises its profits in order 

Marx's Concepts 


to be able to reinvest, so must its rivals. The fact that each firm is 
involved in exploiting wage labour means that none of them dare 
rest on its laurels. 

However successful a firm may have been in the past, it lives in 
fear of a rival firm investing profits in newer and more modern 
plant and machinery. No capitalist dare stand still for any length 
of time, for that would mean falling behind the competitors. And 
to fall behind is eventually to go bust. It is this which explains the 
dynamism of capitalism. The pressure on each capitalist to keep 
ahead of every other leads to the continual upgrading of plant and 

So it is that capitalism becomes not merely a system of exploit- 
ing "free" wage workers, but also a system of compulsive 
accumulation. The Communist Manifesto, which Marx wrote 
with Engels early in 1848, insisted: 

The bourgeoisie, during its rule of scarce one hundred years, has 
created more massive and more colossal productive forces than 
all the preceding generations put together. 

It emphasised the continual transformation of industry under 

The bourgeoisie cannot exist without constantly revolutionising 
the means of production... Constant revolutionising of produc- 
tion... distinguishes the bourgeois epoch from all earlier ones. 

In Capital Marx sees the continual drive to build up ever bigger in- 
dustry as the characteristic feature of capitalism: 

Fanatically bent on making value expand itself, he [the capital- 
ist] ruthlessly forces the human race to produce for production's 
sake... Accumulation for the sake of accumulation, production 
for production's sake! 31 

The work's first volume begins with analysing production for the 
market ("commodity production"), then looks at what happens 
when wage labour arises and labour power becomes a commod- 
ity, and finally culminates in showing how production using wage 
labour brings about a process of compulsive accumulation that ig- 
nores human need and individual desires. 


Understanding the System: Marx and Beyond 

Capital is not then defined just by exploitation (which occurred 
in many precapitalist societies), but by its necessary drive to self- 
expansion. The motivation for production and exchange is 
increasing the amount of value in the hands of the capitalist firm — 
a process for which some Marxist writers use the (in my view 
confusing) neologism "valorisation". 32 

So the system is not just a system of commodity production; it is 
also a system of competitive accumulation. This creates limits to 
the action possible not only for workers, but also for capitalists. 
For if they do not continually seek to exploit their workers as 
much as is practically possible, they will not dispose of the surplus 
value necessary to accumulate as quickly as their rivals. They can 
choose to exploit their workers in one way rather than another. 
But they cannot choose not to exploit their workers at all, or even 
to exploit them less than other capitalists do — unless they want to 
go bust. They themselves are subject to a system which pursues its 
relentless course whatever the feelings of individual human beings. 

Surplus value, accumulation and the rate of profit 

Machines and raw materials do not themselves create value. Only 
the exercise of human labour has added to the natural wealth that 
existed in a state of nature and only continued human labour can 
increase it still further. Machines and raw materials exist because 
human labour has been applied in the past and they cannot substi- 
tute for it in the creation of new value. But they are necessary if 
labour is to achieve the average level of productivity prevailing in 
a particular society at a particular time. The final value of goods 
produced has to include an element covering the cost of the ma- 
chines and materials used. 

When a company produces cloth by employing workers to 
work on power looms that weave wool, the price of the final 
product has to cover not only the cost of providing the labour 
power of the workers (their wages) and the profit of the company, 
but also the cost of the wool and the wear and tear to the power 
looms. If the power loom can keep going for ten years, then in 
each year one tenth of its cost has to be covered by the annual 
sales of the cloth — this is what accountants refer to the deprecia- 
tion costs of capital. Or, to put it another way, the labour 
incorporated in the value of the cloth includes not only the new 

Marx's Concepts 


socially necessary labour expended by the workers, but also the 
"dead labour" used to produce the wool and one tenth of the 
power loom. 

For these reasons, Marx argued that the investment made by 
the capitalist could be divided into two parts. One was the expen- 
diture on paying wages to hire the workers. This he called 
"variable capital" — because it was capital that by putting labour 
power to work expanded value to create surplus value in the 
course of production. The other part was expenditure on the 
means of production. He called this "constant capital" because its 
existing value passed into the value of the goods produced with- 
out growing any bigger — its value was simply transferred to the 
final product. In the case of fixed constant capital (factory build- 
ings, machinery etc) this took place over several production cycles; 
in the case of circulating constant capital (raw materials, energy, 
components) in a single production cycle. 

Marxists usually use the letter v to stand for variable capital 
(wages that purchase workers' labour); c to stand for constant 
capital (plant, equipment and raw materials); s to stand for surplus 
value. The ratio of surplus value to variable capital (wages) is the 
ratio of the length of the working day the worker gives to capital 
compared to that which provides for themselves — sometimes 
called the rate of exploitation. It can be represented by s/v. 

But for the capitalist, the ratio of surplus value to wages is not 
the only thing that matters, since his investment is bigger than 
simply what he has spent on wages. He is interested in making his 
total capital expand, not just that which goes into wages. What 
matters, therefore, is the ratio of surplus value to total investment — 
that is, expenditure on instruments and materials of production as 
well as on wages. This is the "rate of profit", which Marx depicted 
as s/(c+v). 

It is affected not only by the ratio of surplus value to wages, but 
also by the ratio of expenditure on instruments and materials of 
production (constant capital) to wages (variable capital). Marx 
called this last ratio (c/v) the "organic composition of capital". 
This varies from industry to industry and over time. Different pro- 
duction processes can use the same amount of labour but different 
amounts of plant and equipment; the cost of equipment in a fac- 
tory employing 1,000 people to sew cloth into clothes is less than 
that to employ the same number to smelt iron ore into steel. This 
has important implications for the dynamic of capitalism. It is 


Understanding the System: Marx and Beyond 

driven forward not only by concern with the ratio of surplus value 
to wages, but by the drive to maintain and increase the ratio of 
surplus value to different levels of total investment. It is a point we 
will have to return to repeatedly. 

Primitive accumulation 

Today we take the buying and selling of labour power for granted. 
It seems as "natural" as the rising and setting of the sun. Yet 
nowhere was it more than a minor feature of any society until a 
few hundred years ago. So in Europe in the late Middle Ages, or in 
Africa and Asia at the time of European colonisation in the 18th 
and 19th centuries, most people had at least some direct access to 
the means of getting a livelihood — even if they had to hand over a 
slice of what they produced to a parasitic landlord. Peasants could 
grow food on their own land and craftsmen make goods in their 
own little workshops. 

What changed this, according to Marx, was a primeval act of 
robbery — the use of force to remove masses of people from any 
control over the means of production. This was often carried 
through by the state at the behest of some of the most privileged 
groups in society. In England and Wales, for example, the rise of 
capitalism was accompanied by "enclosures" — the forcible driving 
of peasants from common land they had cultivated for centuries. 
Laws against "vagrancy" then compelled the dispossessed peas- 
ants to seek work at whatever wage they could get. In Scotland the 
"clearances" had the same effect, as the lairds drove the crofters 
(small farmers) from the land so as to replace them first by sheep 
and then by deer. As Britain's rulers carved out an empire for them- 
selves throughout the rest of the world, they took measures to 
bring about the same separation of the mass of people from con- 
trol over the means of gaining a livelihood. In India, for example, 
they granted complete ownership of the land to the already highly 
privileged zamindar class. In East and South Africa they usually 
forced each household to pay a fixed sum of money, a poll tax, 
which it could only raise by sending some of its members to seek 
employment with European ranchers or businessmen. 

Marx called this process of creating the conditions for the 
growth of capitalist production "the primitive accumulation of 
capital". Marx tells how: 

Marx's Concepts 


The discovery of gold and silver in America, the extirpation, en- 
slavement and entombment in mines of the aboriginal 
population, the beginning of the conquest and looting of the 
East Indies, the turning of Africa into a warren for the commer- 
cial hunting of black skins, signalised the rosy dawn of the era 
of capitalist production... 33 

But by itself this could not lead to capitalist production. There 
had, after all, been pillage of one sort or another throughout the 
history of class society, going back to Babylonian times, without it 
leading to the rapid accumulation that characterises capitalism. 
The forcible separation of masses of people from any control over 
the means of production — and so from any possibility of making a 
livelihood without selling their labour power — was indispensable. 
"The expropriation of the agricultural producer, of the peasant, 
from the soil, is the basis of the whole process". 34 For this reason, 
it can be misleading to refer to any forcible seizure of wealth by 
capitalists as "primitive accumulation". 35 

In Marx's writings it has two aspects: on the one hand the "free- 
ing" of the mass of population from any direct access to the means 
of making a livelihood; on the other the accumulation of wealth 
by a class that can use economic necessity to make such "free 
labour" toil for it. 

Once capitalism had established itself, its own economic mech- 
anisms pushed the process of separating people from control over 
the means of production even further, without necessarily needing 
intervention by the state or the use of force to bring it about. Thus 
in Britain in the late 18th century there were still hundreds of 
thousands of handloom weavers, who worked for themselves 
weaving cloth to sell. Within 50 years they had all been driven out 
of business by capitalist firms using power looms. In Ireland in the 
1840s a terrible famine caused by the requirement that hungry 
peasants pay rent to (mainly British) landlords led a million to die 
of hunger and another million to abandon their holdings and seek 
work in Britain and the US. The market could achieve such hor- 
rors without the direct help of the state (except, of course, in 
protecting the property of the landlords). Capitalism had become 
a self-sustaining and self-expanding system destined to absorb the 
whole world into its workings. 


Understanding the System: Marx and Beyond 


Marx and His Critics 

The neoclassical critique of his theory of value 

Marx's theory of value has been under attack ever since Capital 
was first published. The most common form this attack takes is to 
claim that capital as well as labour creates value. After all, it is 
said, a worker using a machine produces much more than a 
worker without one, and all the time workers are being replaced 
by machines that do the same job. It is even possible to conceive of 
an economy in which all work is done by machines. So neoclassi- 
cal economists argue that not only labour but also capital is 
involved in producing things which satisfy human need. And just 
as labour gets paid according to what it contributes to wealth cre- 
ation, so does capital. Each "factor of production" gets a 
"reward" equal to its "marginal output". 

There is a central fallacy in this argument against Marx. It rests of 
a static picture of the economy, in which capital and labour simply 
exist alongside each other. It ignores the palpable reality that the 
means and materials of production themselves have been produced. 
Machines and factory buildings are not things that exist in their own 
right. They are the product of previous human labour. The wheel- 
barrow which aids the toil of the labourer is itself the product of the 
toil of the metal worker. That was why Marx called the means of 
production "dead labour" (as opposed to present work, which is 
"living labour"). They are the products of labour that has taken 
place previously — and can, if necessary, be replicated by the appli- 
cation of labour today. The amount of socially necessary labour 
needed to reproduce them determines their current worth. 

The failure of neoclassical theory to take into account the creation 
of the means of production by labour is no accidental failing. Its 
founders in the late 19th century — the Austrians Carl Menger and 
Eugen von Bohm-Bawerk, the Englishmen W Stanley Jevons and 


Alfred Marshall, the Frenchman Leon Walras, the Italian Vilfredo 
Pareto, and the American John Bates Clark — built the assumption of 
a static system into their theory. They viewed the whole economy as 
like a street market where the buyers calculate what combination of 
goods gives them the best value for the money they have got in their 
pockets, while the stallholders calculate the best price they can get 
for each of their goods. The mutual adjustment of the price each 
seller is willing to accept and each buyer is willing to pay leads to all 
the goods being sold. And, since each seller is in turn the buyer from 
someone who has bought from someone else, a whole network of 
prices is set up which ensures that what is produced is exactly what 
people want. Walras claimed to show how this works for a national 
economy with hundreds of pages of equations and graphs. 

Inbuilt into the whole approach was a very unreal view of cap- 
italism. For, whatever else capitalism is, it is not static. In a real 
street market, people do not agree instantaneously on the prices 
for buying and selling. But neoclassical theory assumed that 
through the mediation of a central auctioneer they could arrive at 
agreed prices instantaneously. Real life haggling often takes quite a 
long time, with prices across the market as a whole being arrived 
at through a process of successive adjustments. Once that is taken 
into account divergences open up between the actual prices of 
goods and those presupposed in the theory. The actual production 
of goods that are to be sold is always a process taking place in 
time. "Price signals" do not tell you what will be wanted when 
production is finished, but what was wanted before it began. The 
simultaneity of the theory is a myth, and the simultaneous equa- 
tions developed on the basis of its assumptions bear little relation 
to really existing capitalism. 

Faced with the reality that production occurs over time, how 
did the founders of neoclassical economics react? They did not 
allow it to affect their theory one iota. Walras, for instance, recog- 
nised that "production requires a certain lapse of time". But he 
then wrote he would deal with the "difficulty purely and simply by 
ignoring the time element at this point"; 1 and when he returned to 
the issue it was to assume that "data" remained "constant for a 
given period of time", 2 as if the transformation of the whole pro- 
ductive apparatus with economic growth would not mean 
continual transformation of the structure of supply and demand. 
Marshall went as far as to admit that "time is the source of many 
of the greatest difficulties in economics", 3 since "changes in the 


Understanding the System: Marx and Beyond 

volume of production, in its methods, and its costs are ever mutu- 
ally modifying one another." This did not, however, stop him 
teaching the theory and a whole generation of mainstream econo- 
mists taking it as proof of the efficacy of market capitalism. An 
updated version of Walras's mathematical model was produced in 
the early 1950s by Kenneth Arrow and Gerard Debreu which at- 
tempted to take time into account. But Arrow himself recognised 
that the model only works "if you assume no technological 
progress, no growth in population and lots of other things". 4 

The refusal of the neoclassical school to grasp the basic point 
that capitalism is a system undergoing continual transformation 
that disrupts the old price structure and prevents any settled equi- 
librium means that it provides at best an apologetic description of 
things as they exist at any moment in time, not an account of eco- 
nomic developments and dynamics. 

The neoclassical school's own theory of value, which it coun- 
terposes to the theories of Smith, Ricardo and Marx, is in terms of 
the utility which a commodity gives — that is, how individuals eval- 
uate the commodity compared to other commodities. But this 
leaves completely unresolved the basis for measuring the utility for 
one person compared to another. How do you measure the "util- 
ity" of a glass of water to someone in the desert with the "utility" 
of a diamond tiara to a princess? The most you can do is list the 
preferences of individuals. But to explain why the preferences of 
some individuals matter more than the preferences of others you 
have to explain why some are wealthier than others — and that de- 
pends on factors to do with the structure and dynamic of capitalist 
society which "utility" theory ignores. 

Pareto replaced the term "utility" by "ophelimity" 5 because, as 
his American contemporary Irving Fischer put it, "the great untu- 
tored and naive public... find it hard to call an overcoat no more 
truly useful than a necklace, or a grindstone than a roulette 
wheel". 6 Some later neoclassical theorists dropped any notion of 
value altogether — although "marginal utility" continues to be 
taught in school and college textbooks to this day as the "modern" 
answer to the labour theory of value. 

Neoclassical economists have not succeeded in giving an objec- 
tive basis to their theory of value, despite more than a century of 
effort. Of course, ultimately, someone must want to use something 
(or, at least be able to sell it to someone else who will use it) if they 
are going to pay for it. But it is not use that determines price. 

Marx and His Critics 


Nor can "marginal output" as defined by the neoclassical 
school provide an answer. This is measured, they argue, by the 
value of the capital used up in producing it; but when they define 
the value of that capital they do so in terms of the marginal output. 
They end up saying, in effect, that "the marginal value of capital 
equals the marginal value of capital", or "profit equals profit". 
Statements of this sort cannot explain anything. All they do is to 
state that if something exists, it exists. 

Orthodox economics in fact does no more than state that cer- 
tain things are bought and certain things are sold at present, 
without explaining why these things are produced and not others, 
why some people are rich and some poor, and why some goods 
pile up unsold while people who desperately need them go with- 
out, or why sometimes there are booms and at other times slumps. 

These points were made against marginal economics more than 
80 years ago by the Austrian Marxist Rudolf Hilferding and the 
Russian revolutionary Nicolai Bukharin. They have been put 
across more recently in a rigorously logical form by dissident aca- 
demic economists known as the "Cambridge School". 7 But the 
capacity of dissident economists to point out the absurdities in 
neoclassical theory has not weakened its hold on academic eco- 
nomics. It has simply led to ever more obtuse mathematical 
models being used to provide an appearance of scientific rigour. As 
Joan Robinson pointed out half a century ago: 

Quantitative utility has long since evaporated but it is still 
common to set up a model in which quantities of "capital" 
appear, without any indication of what it is supposed to be a 
quantity of. Just as the problem of giving an operational mean- 
ing to utility used to be avoided by putting it into a diagram, so 
the problem of giving a meaning to the quantity of "capital" is 
evaded by putting it into algebra. 8 

Recognition of the difficulties with their own theory has, on occa- 
sions, forced those who otherwise accept the neoclassical system 
to try to reinforce it with elements from the labour theory of value. 
So Marshall suggested there might occasionally be merit in using a 
labour theory of value: "the real value of money is better measured 
for some purposes in labour rather than in commodities", al- 
though he hastened to add, "This difficulty will not affect our 
work in the present volume..." 9 John Maynard Keynes also half 


Understanding the System: Marx and Beyond 

grasped the limitations of the very neoclassical system whose pos- 
tulates he took for granted. At one point in his most famous work, 
the General Theory of Employment, Money and Interest, he 
recognised that you cannot simply add together different sets of 
physical commodities at one point in time and compare them with 
a different set at a later point. 10 To make such comparisons in- 
volves "covertly introducing changes in value". 11 To deal with this 
problem, he dropped the usual assumptions of neoclassical theory 
and made half a turn to a labour theory of value, 12 suggesting that 
output could be measured by "the amount of employment associ- 
ated with a given capital equipment". 13 He explained later: 

I sympathise with the pre-classical [sic] doctrine that everything 
is produced by labour, aided by what used to be called art and is 
now called technique, by natural resources... and by the results 
of past labour, embodied in assets..." 14 

Neither Marshall nor Keynes was prepared to go further and jetti- 
son the neoclassical system as a whole. But if they had taken their 
own observations of these points seriously, they would have been 
compelled to do so. 

The failings of the neoclassical system provide at least a partial, 
negative, proof of Marx's approach. For his theory of value avoids 
such a subjective and static approach. Marx's theory is objective 
because it is not based on individual evaluations of a commodity, 
but on the necessary amount of labour needed to produce it given 
the level of technology existing in the system as a whole at a par- 
ticular point in time — both the direct living labour of the worker 
and "dead labour" embodied in the equipment and materials of 
production used up in the production process. For Marx, it is the 
pressure different capitals exert on each other, not the evaluations 
of individuals, that matters, since any capitalist who prices a com- 
modity at a level higher than the amount of socially necessary 
labour needed to produce it will soon be driven out of business. 
The law of value is therefore an external force operating on every 
capitalist through the interaction of all capitalists once there is the 
general production of commodities for exchange mediated by 
money. Since the "individual capitalists", writes Marx, "confront 
one another only as commodity-owners, the 'inner law' enforces 
itself only through their competition, their mutual pressure upon 
each other, whereby the deviations are mutually cancelled". 15 

Marx and His Critics 


The relation between capitals cannot be understood as some- 
thing fixed and unchanging. It is a dynamic process, based on the 
interaction through time of different capitals, so that the average 
"socially necessary labour" at any point is the result of individual 
processes of production organised independently of each other with 
different, often changing, amounts of concrete labour. The first cap- 
italist to introduce a new technique in any section of industry will 
be able to produce goods with less than the amounts of labour pre- 
vailing in the system as a whole, and will be able to capture markets 
from others. But once other capitalists adopt the technique, this ad- 
vantage is lost. Only a capitalist who controls a very large part of 
the market for particular commodities, or who can exert political 
pressure to impede others accessing his markets, will be able to get 
away for longer or shorter periods of time with charging prices 
which reflect amounts of labour higher than those that are socially 
necessary. The law of value only operates as the result of the pres- 
sures these different capitals exert on each other through time. Any 
still photograph from the moving film of capitalist development 
will always show discrepancies — and sometimes large ones — from 
the law of value. But the film itself will show the discrepancies even- 
tually disappearing under the pressure of inter-capitalist 
competition even as other discrepancies arise. 

Value and prices 

It is this dynamic aspect to Marx's theory that enables it to deal 
with a problem that beset the attempts by Smith and Ricardo to 
base value on labour. This is that the ratio of labour to investment 
varies from industry to industry. Yet in practice the rate of profit 
(the ratio of the surplus value to investment) does not vary in the 
same way, even when wages are more or less the same level and the 
rate of exploitation must be about the same. The prices of goods 
seem to depend not on the amount of socially necessary labour 
needed to produce them, but on a mark up on the cost of capital 
investment. The bigger the capital investment the bigger, it seems, 
is the mark up. A capitalist selling something produced by one 
person working on an expensive machine will expect a bigger 
mark up than for something produced by one person working on 
a cheap machine. The fact that some industries are more "capital 
intensive" than others implies that prices have to diverge from 


Understanding the System: Marx and Beyond 

values in terms of labour if profitability is not to be much lower in 
some cases than others. 

This is what led Adam Smith to dilute his labour theory of value 
with another, contradictory approach. The sale of goods produces 
a payment that is divided up into different "revenues" — wages for 
the workers, profit for the industrialist, interest for the banker 
who lent the industrialist money, and rent for the landlord. Smith 
contradicts his own initial labour-based theory of value by argu- 
ing that each of these revenues adds to value. David Ricardo was 
more consistent than Smith and tried to stick to the pure labour 
theory. But this left a gap in his theory that economists who came 
after him could not solve — one which eventually opened the way 
to the neoclassical abandonment of the labour theory of value. 

Marx could, however, deal with the problem — usually called 
the "transformation problem" — precisely because his model is a 
dynamic one that operates through time. His solution depends on 
looking at how firms will react to the emergence of different profit 
rates. Those with lower profit rates will begin to move their capi- 
tal elsewhere. This will cause a potential shortage in what they 
have been producing, leading to a rise in prices above their value in 
labour terms. Other firms who use those products as inputs to 
their own production (either directly or through paying their 
workers to buy them to replenish their labour power) 16 are forced 
to pay the higher prices, in the process effectively handing over 
some of the surplus value in their own hands. The equalisation of 
the rate of profit takes place through the redistribution of surplus 
value within the capitalist class. 

This does not in any degree alter the fact that the surplus value 
came from the exploitation of workers in the first place, and that 
every change in the socially necessary labour time needed to pro- 
duce a commodity has an effect on its price. It is the flow of 
already produced surplus value from one capitalist to another 
through time that equalises the rate of profit 17 — which is also why 
there can be big differences between the rates of profit in different 
parts of the system when there are impediments to the flow of 
value through the system (for instance, when firms have very large 
amounts of investment tied down immovably in certain sorts of 
fixed capital or when states prevent investment moving out of 
what they see as priority industries). 

Marx's solution to the problem posed in Smith and Ricardo was 
attacked within two years of it appearing in Volume Three of 

Marx and His Critics 


Capital by the marginalist Bohm-Bawerk. The same arguments he 
used have been employed repeatedly every since. They have often 
thrown Marxists onto the defensive, with many accepting the core 
of the criticism and retreating from the attempt to understand the 
dynamics of capitalism using Marx's concepts. This happened, for 
instance, soon after the revival of interest in Marxism after the 
events of 1968. Figures on the left such as Ian Steedman and Geoff 
Hodgson took up arguments essentially the same as those used 
against Marx by Bohm-Bawerk (although they did not accept the 
marginalist theory of value) and his successors like Samuelson. 18 
Marxist scholarship, already on the defensive for political reasons 
inside university economics faculties, often retreated into scholas- 
tic debates over texts or into obtuse mathematical calculations as 
remote from the real world as those of their mainstream colleagues. 
The result overall was, as Ben Fine has put it, "an increasingly and 
exclusively academicised Marxism" 19 and "limited engagement 
with the world of capital as opposed to that of Capital". 20 

The criticism of Marx's approach centres around the contention 
that simply looking at the movement of value between capitals 
after production has taken place cannot explain final prices, since 
it does not explain the prices of the inputs into production (the 
means of production and labour power). For the inputs themselves 
are commodities with prices different to their values. So Marx's 
method, it is claimed, explains prices in terms of prices, not in 
terms of labour values. 21 

The Ricardian, Ladislavs von Bortkiewicz, attempted in 1907 
to solve the problem of deducing prices from labour values math- 
ematically, using simultaneous equations. He used a model in 
which there is no change in the amount of capital investment from 
one cycle of production to the next (what is called "simple repro- 
duction"). His equations supposedly showed that any attempt to 
provide a generally applicable way of transforming labour values 
into prices led to one of the "equalities" taken for granted by 
Marx not working. Either total price did not equal total value, or 
total profit did not equal total surplus value. 

Every attempt to deduce prices from values for most of the 20th 
century ran into the same problem. The response of Marxists was 
either to abandon the central feature of the labour theory of value 
or to conclude, as for instance Paul Sweezy did in 1942, that "the 
Marxian method of transformation is logically unsatisfactory" but 
that the "patterns of development" of value and price "will differ 


Understanding the System: Marx and Beyond 

only in minor details". 22 A somewhat similar conclusion was ar- 
rived at by Miguel Angel Garcia and Anwar Shaikh among others 
in the late 1970s using models that were much less mathematical 
and easier to follow than von Bortkiewicz's. 23 Shaikh showed that 
total price could equal total value, but total profit would not 
always equal total surplus value. Garcia claimed to prove that 
both equalities could hold. But he could only do so by allowing a 
change in the rate of exploitation from one production cycle to the 
next, since the shift in prices caused by the movements of value be- 
tween sectors caused changes in the relative prices of wage goods 
and capital goods. 24 

Since then, however, a number of Marxists have been able com- 
pletely to rescue Marx's position by challenging the fundamental 
assumption made by von Bortkiewicz, Sweezy, Shaikh and many 
others — the reliance on simultaneity. 25 The method of simultane- 
ous equations assumes that the prices of the inputs to production 
have to equal the prices of the outputs. But they do not. The out- 
puts are produced after the inputs have gone into production. Or, 
to put it another way, the value of the inputs for a process A will 
differ from that of the same inputs for a later process B — even if in 
terms of their physical composition as use values they are identi- 
cal. The value of a ton of steel used to make a machine today will 
not be the same as the value used to make an identical machine 
next week. 26 

But, argue the critics of Marx, this still leaves the inputs into 
production as prices, not as values, and to reduce them to labour 
values involves an infinite regress. The investment need to produce 
the inputs needs to be broken down into labour values, but that is 
not possible without breaking down in turn the investment needed 
to produce it, ad infinitum. 

There is a simple response to those who pose the problem like 
this: Why? Why do the investments needed to produce the inputs 
have to be broken down in terms of their labour value when they 
themselves were produced? 27 

The starting point for looking at any cycle of production is the 
money price of the inputs needed to undertake it. The exercise of 
labour in the production process then adds a certain amount of 
new value, which forms the basis of the new commodity, the price 
of which in turn is formed through the movement of surplus value 
from capitalists who would otherwise get a higher than average 
rate of profit to those who would get a lower one. 

Marx and His Critics 


There is no need to go back in history to decompose into labour 
values the prices of things which were paid for at the beginning of 
the production round, in order to understand the impact of creat- 
ing new value and surplus value on the dynamics of the system. It 
is no more necessary than it is in physical dynamics to decompose 
the momentum of an object that strikes another into all the forces 
that have previously acted on it to create that momentum, going 
right back to the foundation of the universe with the big bang; or 
than it is necessary in biology to know the whole history of the 
evolution of an organism, going right back to the first formation 
of organic life forms, in order to see what the effect of a genetic 
change will be in the present. 

As Guglielmo Carchedi has pointed out, "If this critique were 
sound, it would mean the bankruptcy not only of Marx's transfor- 
mation procedure but also of social science in all its versions" 
including those that criticise Marx: 

This critique, in fact, would have to apply to any social phe- 
nomenon inasmuch as it is determined by other phenomena, 
both present and past. Social sciences, then, would become an 
endless quest for the starting point of the inquiry. 28 

It would never be possible to analyse how some current actions re- 
lated to the cumulative products of past actions. 

Skilled and unskilled labour 

The same dynamic character of Marx's model also dispels what 
has been presented from Bohm-Bawerk onwards as another prob- 
lem for the labour theory of value. This is how the contribution of 
skilled labour to value creation is to be measured. Marx seems to 
see this as easily solved. He writes that: 

skilled labour counts only as simple labour intensified, or rather, 
as multiplied simple labour, a given quantity of skilled being 
considered equal to a greater quantity of simple labour... The 
different proportions in which the different sorts of labour are 
reduced to unskilled labour as their standard, are established by 
a social process that goes on behind the back of the producers 
and, consequently, appear to be fixed by custom. 29 


Understanding the System: Marx and Beyond 

This explanation is fully adequate when the same job is done by a 
skilled worker and unskilled worker, with the skilled worker doing 
it much more quickly. An hour of the skilled labour will be worth 
more than one hour of the average "socially necessary" labour in 
the system as a whole, while the unskilled labour will be worth less 
than that. 

There is a problem, however, when it comes to skilled labour 
that cannot be replaced by a greater quantity of unskilled labour. It 
does not matter how many unskilled labourers a capitalist em- 
ploys, they will never be able to do the same task as a skilled 
toolmaker or a systems analyst. How then can the value produced 
by the second group be measured in terms of hours of labour of 
the first group? It seems that any attempt to do so must involve an 
arbitrariness that undermines the basic theory. Bohm-Bawerk 
argued that when Marx writes that "a social process" explains the 
measurement, he is taking for granted that which he is trying to 
explain. For Bohm-Bawerk this proved that it is not the amount of 
labour in goods which determines their prices, but the way people 
evaluate them in relation to other goods (their "utility") and that 
this deals a death blow to the labour theory of value. 

However, the problem for the theory evaporates once the law of 
value is seen as something working through time. The develop- 
ment of technology again and again leads to jobs emerging that 
can only be carried out by those with particular skills. At first there 
is no objective measure of the amount of socially necessary labour 
time needed to produce them, and those in possession of such 
skills or the goods produced by them can receive payments which 
bear no obvious relation to labour time. In effect, value flows to 
those controlling a monopoly of these skills from the rest of the 
system. But this is only a transitory phase, even if sometimes a long 
one, as capitalists elsewhere in the system will do their utmost to 
try to gain control of some of the benefits of the new skills for 

There are two ways they can do this. They can train new groups 
of workers to acquire the skills. This effectively amounts to using 
one sort of labour to create new labour power capable of doing the 
skilled work, so that the final labour is in fact composite labour, 
made up of the living labour of the immediate workers and a form 
of dead labour embodied in their labour power as skills. The cap- 
italists can get this extra element in labour power directly by on 
the job training for workers (as with apprenticeship systems), they 

Marx and His Critics 


can leave its provision to the workers themselves (when workers 
pay to go through courses to get skills qualifications) or they can 
rely in part on the state providing it through its training courses. 
But in each case, dead labour is embodied in the enhanced labour 
power and then transferred into the products of the labour 
process, as with the dead labour embodied in means and materials 
of production. 30 

But this still leaves a question unresolved. Who trains the train- 
ers? Skilled trainers cannot themselves get their skills from 
unskilled workers. If their skills are monopoly skills and they pro- 
duce goods that cannot be produced by unskilled workers, however 
many work together at the job, then those who own those goods 
will be able to charge monopoly prices that do not reflect labour 
values, but simply how much people are prepared to pay. 

This will be true of certain skills and certain goods at any par- 
ticular point in time. But over time this labour too will be reduced 
to some objective ratio of other labour. Capitalists elsewhere in the 
system will actively seek out new technologies that undermine 
such skill monopolies by enabling the tasks to be done by much 
less skilled labour. In this way, the reduction of skilled labour to 
unskilled labour over time is a never ending feature of capitalist ac- 
cumulation. If enough unskilled labour is trained up to the level of 
skilled labour needed to produce particular commodities, those 
commodities will cease to be scarce and their value will fall to the 
level that reflects the combination of the labour needed to repro- 
duce average labour power and the extra cost of the training. 

As Carchedi puts it: 

Due to the introduction of new techniques in the labour 
process, the level of skills required of an agent is lowered. The 
value of his or her labour power is then devalued. We can refer 
to this process as devaluation (of labour power) through de- 
qualification (of skills). It is this process which reduces skilled 
to unskilled labour and thus (at least as far as the value of 
labour power is concerned) alters the exchange relations be- 
tween the commodities of which those different types of labour 
power are an input. It is this real process which justifies the the- 
oretical reduction of skilled to unskilled labour, or the 
expression of the former as a multiple of the latter... 

The process of devaluation through dequalification is a con- 
stant tendency in capitalist production, due to the constant need 


Understanding the System: Marx and Beyond 

capitalists have to reduce the level of wages. On the other hand, 
the same techniques create new and qualified positions (the 
counter-tendency) which, in their turn, are soon subjected to de- 
qualification... At any moment in time we can observe both the 
tendency (the dequalification of certain positions and thus the 
devaluation of the agents' labour power) and the counter-ten- 
dency (the creation of new, qualified positions for which agents 
with a high value of labour power are needed). 31 

Labour may not be reducible to socially necessary labour time in- 
stantaneously. But it is so reduced over time through the blind 
interaction of different capitals with each other. Again the law of 
value has to be understood as pressurising the individual compo- 
nents to operate in a certain way, not as a formula establishing 
fixed, fast frozen relations between them. 

Marx's basic concepts survive all the criticisms once they are 
not interpreted through the static framework, ignoring the process 
of change through time that characterises the neoclassical system. 

Marx and His Critics 



The Dynamics 
of the System 

Illusions and reality 

The history of capitalism in Marx's time and that of his immedi- 
ate successors was punctuated by economic crises that occurred 
about once every ten years — there were 15 in the US in the 110 
years between 1810 and 1920. For a few years firms would invest 
on a large scale, taking on new workers; building new factories 
and buying new machines would create a demand for the products 
of industries like construction, steel and coal, which in turn would 
take on new workers; the new workers would receive wages which 
in turn enabled them to buy goods. Very fast rates of economic 
growth led firms to do everything they could to lure people from 
the countryside — and increasingly from other, poorer countries — 
into selling their labour power in the towns. Unemployment 
would fall to around 2 percent. Then something always seemed to 
go wrong. Giant firms would suddenly go bust, cancelling the 
demand for the products of other industries, where firms would 
also go bust; right across the economy workers — many only re- 
cently drawn into industry — would be sacked; their loss of buying 
power then ensured that the crisis ricocheted from industry to in- 
dustry; panic would sweep through the capitalist class, while 
unemployment shot up virtually overnight to 10 percent or higher, 
where it would stay for months or even years until a new period of 
rapid growth took off. 

The mainstream economics of the time denied that such "crises 
of overproduction" were endemic to the system, basing their ar- 
guments on a populariser and vulgariser of Adam Smith's ideas, 
Jean-Baptiste Say. His "law" argued that supply and demand 
must always coincide, since every time someone sold something 


someone else must have bought it: supply, it was claimed, created 
its own demand. So John Stuart Mill argued: 

Each person's means for paying for the production of other 
people consists in those [commodities] that he himself pos- 
sesses. All sellers are inevitably by the meaning of the word 
buyers... A general over-supply... of all commodities above the 
demand is... [an] impossibility... People must spend their... 
savings... productively; that is, in employing labour. 1 

The founders of the neoclassical school had to accept that in prac- 
tice the economy experienced a "trade cycle" or "business cycle" 
of booms and recessions, in which for some reason supply and 
demand did not always balance as their theory claimed. Their re- 
action was to blame these things on external factors that somehow 
led to temporary distortions in an otherwise fundamentally 
healthy system. So Jevons wrote that the business cycle was a 
result of sun spots which, he claimed, affected the climate and 
therefore the productivity of agriculture and the profitability of 
trade, while Walras saw crises as disturbances caused by the failure 
of prices to respond to supply and demand, comparable in effect 
to passing storms on a shallow lake. 2 

Some later neoclassical economists did try to develop theories of 
the business cycle. Anwar Shaikh has summed up their approach: 

the system is still viewed as being self-regulating; only now 
the adjustment is seen as being cyclical rather than smooth... 
In orthodox theory a cycle is not a crisis... Cycles must be 
viewed as "small fluctuations"... which at first approxima- 
tion one may justifiably neglect... Violent or prolonged 
expansions and contractions arise from external factors... 
Crises, therefore, remain outside the normal process of capi- 
talist reproduction. 3 

This view still persists in what is known as "real business cycle the- 
ories". These hold that: 

business cycles are the aggregate result of the optimum response 
of individuals to changes in the economic environment... The 
economic cycle is assumed to have a stochastic [irregular — CH] 
oscillation around a trend. 4 


Understanding the System: Marx and Beyond 

They still do not allow what they see as short-term aberrations to 
undermine their faith in an unchallengeable system of laws which 
lay down how any efficient economy must operate. 

The possibility of crisis 

Karl Marx, by contrast, argued that the possibility of general 
crises of overproduction was built into the very nature of capital- 
ism. He destroyed the arguments based upon Say's law in a couple 
of paragraphs in the first volume of Capital. Of course, he ac- 
knowledged, every time someone sells an article someone else buys 
it. But, argued Marx, once money is used to exchange goods 
through the market, it does not follow that the seller has then im- 
mediately to buy something else. Money acts not only as a 
measure of value in directly exchanging goods, but also as a means 
of storing value. If someone chooses to save the money they get 
from selling a good rather than spending it immediately, then there 
will not be enough money being spent in the system as a whole to 
buy all the goods that have been produced: 

Nothing can be more childish than the dogma that because 
every sale is a purchase and every purchase a sale, therefore the 
circulation of commodities necessarily implies equilibrium of 
sales and purchases. If this means that the number of actual 
sales is equal to the number of purchases, it is mere tautology. 
But its real purport is to prove that every seller brings his buyer 
to market with him. Nothing of the kind. The sale and the pur- 
chase constitute... an exchange between a commodity-owner 
and an owner of money, between two persons as opposed to 
each other as the two poles of a magnet... 

No one can sell unless some one else purchases. But no one 
is forthwith bound to purchase, because he has just sold. 
Circulation bursts through all restrictions as to time, place, 
and individuals, imposed by direct barter, and this it effects by 
splitting up, into the antithesis of a sale and a purchase, the 
direct identity that in barter does exist between the alienation 
of one's own and the acquisition of some other man's product. 
If the interval in time between the two complementary phases 
of the complete metamorphosis of a commodity become too 
great, if the split between the sale and the purchase become 

The Dynamics of the System 


too pronounced, the intimate connexion between them, their 
oneness, asserts itself by producing — a crisis. 5 

The inevitability of crisis 

These arguments used by Marx in Volume One of Capital "imply 
the possibility, and no more than the possibility, of crises". 6 But in 
Volume Three he went further, to argue for the inevitability of 
crises. He did so by moving beyond the most abstract considera- 
tions about the buying and selling of commodities with money to 
look at the concrete process involved in capitalist production and 
exchange. As is often remarked, Marx did not provide a single, in- 
tegrated account of the crisis. Rather he refers to different aspects 
of the crisis in writings that are scattered in different parts of the 
text. 7 But it is not that difficult to construct a coherent account 
from these. 

The starting point is that competitive accumulation means that 
capitalists are simultaneously trying to increase the output of their 
goods as much as possible at the same time as trying to maximise 
profits by holding down wages. But wages constitute a major part 
of the money available to buy goods. Production tends to move in 
one direction, the consumption of the masses in the other: 

The conditions of direct exploitation, and those of realising it, 
are not identical. They diverge not only in place and time, but 
also logically. The first are only limited by the productive power 
of society, the latter by the proportional relation of the various 
branches of production and the consumer power of society. But 
this last-named is based on antagonistic conditions of distribu- 
tion, which reduce the consumption of the bulk of society to a 
minimum varying within more or less narrow limits. It is fur- 
thermore restricted by the tendency to accumulate, the drive to 
expand capital and produce surplus value on an extended 
scale... The more productiveness develops, the more it finds 
itself at variance with the narrow basis on which the conditions 
of consumption rest... 8 

Some people have interpreted this passage as meaning that the mere 
fact that workers are exploited limits the scale of the market and 
creates crises. 9 Such "underconsumptionist" versions of Marxism 


Understanding the System: Marx and Beyond 

share some features in common with the form of the mainstream 
economics that developed in the 1930s under the influence of 
Keynes. The conclusion seems to be that capitalism can escape 
crisis if the state intervenes to raise consumption the moment a re- 
cession seems likely to develop. 

But Marx's own argument does not stop with pointing to the 
possibility of consumption falling below production. He goes on 
to insist that the double nature of one set of commodities, those 
that make up the means of production, as both values and use 
values, makes that inevitable. A Russian Marxist economist of the 
late 1920s, Pavel V Maksakovsky, spelt out how this double 
nature works itself out. 10 As we have seen, the exchange value of 
goods is determined by the amount of labour required to produce 
them using the average level of techniques and skill operating in 
the system as a whole (what Marx refers to as "abstract labour"). 
But their production involves concrete human labour bringing ob- 
jects ("use values") into physical interaction with each other. The 
correct relations between different exchange values and different 
use values must exist for production to take place. 

The more industry develops, the more complicated these relations 
become. Textile machines cannot be produced without steel; steel 
without iron ore and coal; coal without cutting machinery, winding 
gear and so on. But the chains of physical interaction depend on 
chains of buying and selling, in which coal firms sell to steel firms, 
steel firms to textile firms and textile firms to consumers — that is, to 
people who get wages or profits to spend from other firms so long as 
these can sell their goods. 

Such long, intertwined chains linking production to final con- 
sumption only function if two completely different conditions are 
fulfilled. The correct physical relations between things that go to 
produce other things has to exist determined by the law of physics, 
chemistry and biology. But, at the same time, each act of produc- 
tion has to expand the amount of value (ie the amount of average 
abstract labour) in the hands of the owners of each particular firm. 
The physical organisation of the production of use values has 
somehow to correspond with the capitalist determination of prices 
by values. 

Discrepancies between the two requirements mean that the ex- 
pansion of production inevitably leads to bottlenecks in the supply 
of raw materials, causing their prices to rise, cutting into the profits 
of those capitalists who buy them, and so redistributing surplus 

The Dynamics of the System 


value from the capitalists producing finished goods and compo- 
nents to those producing raw materials. It also means that the 
demand for one vital commodity, labour power, can begin to 
exceed the supply, leading to upward pressure on wages (at least in 
money terms, although workers may not see it like this if rising raw 
material prices cut into the buying power of the expanded wage). 

That is not all. If it were, the problem would simply be a ten- 
dency towards disproportionality between the different parts of 
the economy. 11 But there are further problems. Production will 
not take place at all unless capitalists think they can sustain them- 
selves in competition with other capitalists, by getting a rate of 
profit at least equal to the average in the system as a whole. To 
guarantee this they have repeatedly to reorganise production, 
using more advanced techniques to increase productivity per 
worker. But as all the capitalists try to do this, they continually 
reduce the average amount of labour needed to produce goods — 
and therefore the value of the goods. The physical quantity of 
goods produced by the system will tend to rise, but the value of 
each individual good will tend to fall. The two things necessary 
for the system to function, the physical organisation of produc- 
tion and the flow of value through the system, both change 
repeatedly — but without there being any automatic compatibility 
between the changes taking place. 

Firms undertake production by buying physical equipment (ma- 
chines, buildings, computers and so on) at prices dependent on the 
average amount of labour needed to produce them at a particular 
moment in time. But even as production is taking place, increases 
in productivity elsewhere in the system are reducing the value of 
that equipment and of the goods the firm is producing with it. The 
firm's calculations of profitability were based on the amount it had 
to spend on this equipment in the past, not on what its present 
value is — but it is on its initial investment that the firm has to make 
a profit. So the rapid rate of accumulation that characterises the 
boom has the effect of cutting the prices of each unit of output, 
and this hits the profits to be made on investments made earlier in 
the boom. 

Not only do the values of goods keep changing, but, 
Maksakovsky shows, the reaction of capitalists to these changes 
leads prices to diverge from values. As profits fall, some firms stop 
new investments for a period. This reduces the demand for the 
goods of the other firms that previously supplied them. These then 


Understanding the System: Marx and Beyond 

try to maintain their sales by cutting their prices below the levels 
determined by value while they sack workers in order to try to 
protect their profits on the goods they are selling at reduced prices 
and at that same time cancel their own investments for fear they 
will not be profitable. A wave of contraction goes through the 
economy and with it a general reduction of prices below values. 

The contraction does not last forever. Some firms go bankrupt, 
allowing other firms to buy plant and equipment on the cheap and 
to cut the wages which workers are prepared to accept. Eventually, 
a point is reached where they can expect to get higher than average 
profits it they embark on a new round of investment and a new 
wave of expansion takes off as capitalists rush to take advantage 
of the better business conditions. Competition leads firms to un- 
dertake a level of investment which temporarily exceeds the 
existing output of new machinery, components and raw materials. 
The "overproduction" of the downturn is replaced by "underpro- 
duction" in the upturn, and just as prices before were below values 
in the slump, now they rise above values in the boom. But this only 
lasts until all the new plant and machinery pass into production, 
increasing output at the same time as reducing the value of indi- 
vidual goods, making some investment unprofitable and giving 
rise in time to yet another downturn. 

The central point is that the cycle is not a result of mistaken de- 
cisions by individual capitalists or their governments, but of the 
very way value expresses itself in prices. This takes place through 
a continual oscillation with prices arising above and falling below 
values, not through some continuous equilibrium. 

This cannot be grasped without starting with the objective con- 
tradictions expressed in the notion of value. Only by dialectically 
drawing out these contradictions was Marx able to provide an 
overview of the system's dynamic. 

Credit and financial capital 

The spells of expansion and contraction are modified and intensi- 
fied by the role played by credit — and those who play a special 
part in the development of this, the bankers. 

Capital passes through different forms in the course of capi- 
talist production. 12 It begins as money. This is used to buy 
instruments and materials of production and labour power as 

The Dynamics of the System 


commodities, which in turn are combined in the production 
process to produce other commodities. These are sold to get 
more money, which is then used to buy more means of produc- 
tion and labour power. In this way one cycle of production 
follows another endlessly, so that "every element" in it "appears 
as a point of departure, transit and return". 13 

So capital takes the form of money, of commodities, of means 
of production and labour power, then of commodities again and 
finally of money. For the system to operate, all these forms have to 
exist simultaneously. If production is to keep going without a stop, 
there has to be a supply of money to buy commodities, a supply of 
commodities to be bought as productive capital and a supply of 
labour power. The cycle of capitalist production, then, is made up 
of three interconnected circuits — of money, of productive capital 
and of commodities. Each circuit fulfils a function for capital ac- 
cumulation — and does so to some extent according to a dynamic 
of its own. 

In the early stages of capitalism, when the units of production 
were small, the productive capitalist could operate to some degree 
independently. He had the possibility of financing the buying of 
plant and machinery and paying his workers from his own pocket. 
He also had the possibility of selling his output directly to those 
who consumed it. 

But as the individual enterprises grew bigger, the capitalist often 
found his own resources were not enough to pay in advance for all 
the plant, machinery and materials he needed. He had to borrow 
from others. He came to rely on credit, and on special institutions, 
banks, ready to lend to people in return for interest on these loans. 

At the same time, as the scale of the market grew, he could only 
sell his goods by relying upon specialists in the wholesale and retail 
trades, who would not be able to pay him for all those goods until 
they had, in turn, sold them to the final consumers. The produc- 
tive capitalist borrowed on the one hand and lent on the other. 
Credit became an indispensable part of capitalist production. And 
the greater the extent of capitalist production within a particular 
economy, the longer and more complex became the chains of 
credit, of borrowing and lending. 

The productive capitalist could also become a large scale lender. 
His fixed capital — his factory building and machinery — was only 
renewed every few years. But production provided a more or less 
constant flow of profits. He could lend these profits to others in the 


Understanding the System: Marx and Beyond 

interim before renewing his own fixed capital — and would do so 
in return for the payment of interest. 

Once capitalism is fully developed as the dominant way of pro- 
ducing in a particular economy, the lending of past profits by those 
productive capitalists who do not wish to immediately reinvest be- 
comes the chief source of the funds for those capitalists who do 
wish to invest but lack sufficient past profits to do so. The financial 
system emerges as a network of institutions that mediate between 
different productive capitalists (and the state, insofar as discrep- 
ancies that exist between its immediate tax income and its 
immediate expenditure lead it to also borrow and lend). 

Those who run the financial institutions are out to make profits 
just as much as the productive capitalists are. They have funds of 
their own (their banking capitals) which pay for the expense of 
their operations and bridge any gap that might open up between 
their lending and borrowing (or, at least, are meant to bridge the 
gap — all too often in the history of the system they have not), and 
they expect to earn a profit on them, just as the productive capi- 
talists do on their capitals. There is a difference, however. The 
financial capitalists' profits do not come directly from production, 
but from a share they get of the productive capitalists' profits in 
return for lending to them — that is, interest payments. 

The rate of interest has often been confused in mainstream eco- 
nomic writings with the rate of profit. But in fact the level and 
direction of movement of the two are quite different. The rate of 
profit, as we have seen, is determined by the ratio of surplus value 
to investment in the production process. By contrast, the rate of in- 
terest depends solely upon the supply and demand for loanable 
funds. If there is more money available for lending in an economy, 
then the rate of interest will tend to fall; if there is an increased 
demand for borrowing it will tend to rise. 

Since the profits of productive capitalists are the major source 
of the funds for lending, a high rate of profit will encourage a 
lower rate of interest. On the other hand, if profits are low, more 
productive capitalists will themselves want to borrow and this will 
exert a pressure for interest rates to rise. How these contradictory 
pressures on interest rates work themselves out depends on other 
factors, particularly borrowing and lending by the state and the 
movement of funds in and out of a national economy. But these 
other factors cannot do away with the pressures of real production 
on the financial sector. 

The Dynamics of the System 


Other complications arise out of this state of affairs. The lend- 
ing that financial institutions make is not necessarily restricted to 
the amount they actually have at their disposal as a result of their 
own investment and borrowing. The financial institutions can 
assume that what they have borrowed will not have to be paid 
back immediately. Therefore they can extend their lending beyond 
their immediate means, trusting that enough of it will be paid back 
for them to meet their own debts as they become due. 

This makes sense so long as the productive sector of the system is 
expanding its output; increased lending today can be paid back out 
of increased output and surplus value in the not too distant future. 

Such prophecies about increased lending being recoverable are 
self-fulfilling up to a degree, since the increased lending to produc- 
tive capital encourages it in turn to increase its own levels of 
investment, and to produce more profits from which to repay the 
bankers. But invariably a point is eventually reached when the 
drive for financial profits leads to levels of lending above what can 
be paid back out of the expansion of real output, producing finan- 
cial crises on the one hand and attempts to escape their impact 
through fraud on the other. As Marx puts it, "The credit system 
accelerates the material development of the productive forces and 
the world market", but does this through developing "the incen- 
tive to capitalist production, enrichment through exploitation of 
the labour of others, to the most pure form of gambling and swin- 
dling". 14 Finance drives "the process [of production] beyond its 
capitalist limits" resulting in "overtrade, overproduction and ex- 
cessive credit" 15 in ways that rebound on production itself. 

Marx's view of this process foreshadowed by a century the cur- 
rently fashionable account of Hyman Minsky, 16 according to 
which financial operations invariably move on from a stage of 
normal profitable business ("hedging") to one of speculation 
which culminates at a point (a "Minsky moment") when all of 
what is lent cannot be recovered — and encourages Ponzi 17 or pyra- 
mid schemes whereby money from new investors is simply used to 
pay high interest rates to old investors. 

The final complication is that financial institutions do not only 
use their funds to lend to productive capital. They also lend to in- 
dividuals for their own requirements (notably for buying 
property), or to buy shares in already existing companies through 
the stock exchange. Such use of funds is expected to earn the going 
rate of interest, just as lending to productive concerns does, and 


Understanding the System: Marx and Beyond 

for this reason is regarded by the financial institutions as an "in- 
vestment" of "capital". Yet it in no way contributes to the process 
of capital accumulation, and the interest earned is parasitic on 
what is taking place in the productive sector of the economy. For 
this reason Marx calls it "fictitious capital", describing it as "the 
most fetish like form of the relations of capital", 18 since "capital 
appears as a mysterious and self-creating source of interest" and 
"it becomes the property of money to generate value and yield in- 
terest, much as it is an attribute of pear trees to bear pears". 19 

Finance, speculation and the crisis 

We have seen that the profits of productive capital are the main 
source of the funds that the banks have at their disposal for lend- 
ing, and that the productive capitalists' need for funds for 
accumulation is a major source of borrowing from the banks. This 
means that the cycle of expansion and contraction of new invest- 
ment is accompanied by a cycle of expansion and contraction of 
lending. But the two cycles are not fully in phase with each other. 

Credit expands as the boom begins to take off, with some capi- 
talists keen to lend rising profits and other capitalists keen to 
borrow, all convinced that there will be no problems of repayment 
with interest. But eventually a point is reached where the frenzy of 
investment begins to exceed the funds coming from pools of previ- 
ous profits. Firms outbid one another as they try to get access to 
these pools, raising the level of interest they are prepared to pay to 
get credit. Rising interest rates cut into profits just as rising raw 
material prices and money wages do so as well. They add to the 
pressures tipping the system from expansion into crisis. The con- 
traction that follows makes firms and banks much less willing to 
lend — they fear they may need every penny themselves as their rev- 
enue from sales threatens to decline. But contraction also increases 
the need for many firms to borrow if they are going to make up the 
shortfall in their sales incomes and not be forced into bankruptcy 
by unpaid bills. Interest rates continue to rise for a time, despite 
the shortage of profits to pay them, and add to the downward 
forces in the system. 

Fluctuations are intensified because of something else that 
happens at the height of the boom. Firms and banks see that 
lending is a quick way to boost their profits. They offer credit 

The Dynamics of the System 


through "financial paper" (in effect promises to pay) of various 
sorts far in excess of their cash reserves on the assumption that 
other people and institutions will trust in such "paper" and 
accept it as payment for commodities without trying immedi- 
ately to turn it into cash. In effect, credit created by the banks 
comes to be treated as a form of money — and as "credit money" 
is counted in certain measures of the money supply. 

Such easy credit encourages each firm to undertake massive pro- 
ductive investments as it competes to get a bigger slice of the 
expanding market than its rivals, even though this causes their 
combined output to far exceed the capacity of the market to absorb 
it. Easy credit also enables those on friendly terms with the banks to 
embark on an orgy of luxury spending, and all sorts of crooks and 
fraudsters to join in the very profitable business of borrowing in 
order to lend and lending in order to borrow. The real, underlying 
processes of production, exploitation and creation of surplus value 
get completely hidden from view — until the economy suddenly 
starts turning down and all the bits of paper which represent credit 
have to be repaid from profits which are too small to do so. At this 
point firms and banks come to distrust the ability of each other to 
pay back what has been borrowed, and lending can grind to a vir- 
tual stop in what is today called a "credit crunch": 

The chain of payment obligations due at specific dates is broken 
in a hundred places. The confusion is augmented by the atten- 
dant collapse of the credit system... and leads to violent and 
acute crises, to sudden and forcible depreciations, to the actual 
stagnation and disruption of the process of reproduction, and 
thus to a real falling off in reproduction. 20 

The behaviour of "fictitious capital" serves further to intensify 
the general boom-recession cycle of capitalism. Despite its non- 
productive nature, the monetary value of fictitious capital at any 
point in time represents a claim on real resources that can be con- 
verted into cash and from cash into commodities. When, say, 
share prices are rising during a boom, they add to the capacity of 
their owners to buy goods and tend to intensify the boom; when 
they fall with a recession, this adds to the pressure, reducing ex- 
penditure through the economy as a whole. The inevitably 
unstable, suddenly fluctuating, prices of the various sorts of ficti- 
tious capital add to the general instability of the system as a 


Understanding the System: Marx and Beyond 

whole. They intensify the swings from boom to recession and 
back, and they also play havoc with the capacity of money to pro- 
vide a fixed measuring rod for value. 

Major economic crises almost invariably involve crashes of 
banks and other financial institutions as well as the bankruptcy of 
productive firms and rising unemployment for workers. It is easy 
then for people to misunderstand what is happening and to blame 
finance, the banks or money for the crisis, rather than the capital- 
ist basis of production. 

The modernity of Marx 

Marx's picture of crisis was far ahead of his contemporary main- 
stream economists. It was not until the 1930s that study of crises 
began to be taken seriously by the mainstream. Even the arch- 
priest of free market economics, Friedrich August von Hayek, 
could admit in one passage that Marx was responsible for intro- 
ducing, in Germany at least, ideas that could explain the trade 
cycle, while "the only satisfactory theory of capital we yet possess, 
that of Bohm-Bawerk", had "not helped us much further with the 
problems of the trade cycle". 21 

Recurrent economic crises are as much a part of our world as of 
Marx's. Some at least of the ideological heirs of John Stuart Mill, 
Jevons and Bohm-Bawerk do not try to conceal the fact — at least 
when they are writing for an elite upper class audience in the 
Financial Times or the Economist, rather than propagandising to 
the masses. So the long-time Conservative chancellor of the exche- 
quer in Britain, Nigel Lawson, who once embraced the 
"monetarist" doctrine that crises were an accidental result of cen- 
tral bankers allowing the money supply to go wrong, 22 was 
eventually arguing that he was not responsible for the slump 
which followed the implementation of his policies because the 
"business cycle" is inevitable. They see the crisis as "creative de- 
struction" without making clear that the creative element consists 
of wealth for one class, while the destruction is of the livelihoods 
of others. 

I will return to the question of crises in the 21st century later in 
this book. All that needs to be said for the moment is that there is 
no problem accounting for them by starting with Marx. Indeed, 
the only serious question confronting Marx's crisis theory does not 

The Dynamics of the System 


arise from the occurrence of crises today, but rather from the fact 
that for three and a half decades, from 1939 to 1974, a major cap- 
italist country like Britain did not experience a recession in which 
economic output fell, while the biggest economy, the US, only ex- 
perienced one very brief such recession (that of 1948-9). The 
absence of such crises became a major element in economic dis- 
cussion in the decades of the 1950s, 1960s and early 1970s. And 
without coming to terms with it, one cannot grasp the intractabil- 
ity of the boom-recession cycle today. 

However, if crises were an inevitable feature of capitalism for 
Marx, they were not in themselves the central point in his analysis 
of its long-term dynamic. They were a cyclical feature of the 
system which it had managed to cope with several times by the 
time Capital was published, however great the hardship they had 
caused to the mass of the population, the distress to those capital- 
ists who went bust, or the occasional outburst of popular 
discontent. They were not in themselves going to bring the system 
to an end. As the Russian revolutionary Leon Trotsky put it nearly 
40 years after Marx's death, "capitalism does live by crises and 
booms, just as a human being lives by inhaling and exhaling". 23 
The long-term dynamic came from elsewhere than the crisis — 
from two long-term processes at work in the system, processes 
that were a product of its ageing as it went through each repetition 
of the cycle of expansion and contraction. 

The tendency of the rate of profit to fall 
The theory 

The first of these processes is what Marx called "the law of the 
tendency of the rate of profit to fall" (sometimes called, for short, 
by Marxists since, "the falling rate of profit" — the phrase I will 
often use here). 

This is one of the most difficult parts of Marx's theory for new- 
comers to his ideas to understand, and also one of the most 
contentious. Non-Marxist economists reject it. So the often per- 
ceptive Observer economic columnist William Keegan has 
denounced Marx's account as "an obsolete economic textbook 
which was itself written during the early, faltering phase of unre- 
formed capitalism" quoting the French economist Marjolin to the 
effect that, "A modicum of experience and some knowledge of 


Understanding the System: Marx and Beyond 

history was enough to cast doubt on the [Marxist] theory of an 
inevitable decline of capitalism owing to a falling rate of profit". 24 
Many Marxists who accept the theory of value and the main con- 
tours of Marx's account of the crisis are just as dismissive of it. 25 
Others hedge round their support for it with so many provisos as 
to effectively cut it out of any account of the system's long-term 

Yet Marx himself regarded it as absolutely central. It enabled 
him to assert that capitalism is doomed by the very forces of pro- 
duction which it itself unleashes: 

The rate of self-expansion of capitalism, or the rate of profit, 
being the goal of capitalist production, its fall... appears as a 
threat to the capitalist production process. 26 

This "testifies to the merely historical, transitory character of the 
capitalist mode of production" and to the way that "at a certain 
stage it conflicts with its own further development". 27 It showed 
that "the real barrier of capitalist production was capital itself". 28 

Marx did not pick the idea that profit rates fall out of thin air. 
It was common among economists who preceded him. 29 As Eric 
Hobsbawm has said, "Two things worried the early 19th cen- 
tury businessmen and economists: the rate of their profits and 
the rate of expansion of their industries." Adam Smith had be- 
lieved profit rates must fall as a result of increased competition 
and Ricardo because of supposed "diminishing returns" in agri- 
culture. 30 Marx provided an explanation which did not depend 
on such questionable assumptions, 31 but upon grasping that the 
dynamic of capitalist accumulation contains within it an irre- 
solvable contradiction. 

Each individual capitalist can increase his own competitive- 
ness through increasing the productivity of his workers. The way 
to do this is for each worker to use more and more "means of 
production" — tools, machinery and so on — in his or her work. 
That involves the means of production expanding more rapidly 
than the workforce. There is a growth in the ratio of the physical 
extent of the means of production to the amount of labour 
power working on them — a ratio that Marx calls the "technical 
composition of capital". 32 But other things being equal, a growth 
in the physical extent of the means of production will also be a 
growth in the level of investment needed to buy them. So there 

The Dynamics of the System 


will also be an expansion in the ratio of investment to the work- 
force, in the value of the means of production compared with 
wages (or, to use Marx's terminology, of "constant capital" to 
"variable capital"). This ratio is Marx's "organic composition of 
capital" (as explained in Chapter One). 33 Its growth, for Marx, 
is a logical corollary of capital accumulation. 

Yet the only source of value and surplus value for the system as 
a whole is labour. So if investment grows more rapidly than the 
labour force, it must also grow more rapidly than the creation of 
new value, and profit comes from this. In short, capital investment 
grows more rapidly than the source of profit. As a consequence, 
there will be a downward pressure for the ratio of profit to invest- 
ment — on the rate of profit. 

The reason for the growth of investment is competition — the 
need of each capitalist to push for greater productivity in order to 
stay ahead of competitors. But however much competition may 
compel the individual capitalist to take part in this process, from 
the point of view of the capitalist class as a whole it is disastrous. 
For, as we saw in the previous chapter, capitalists measure the suc- 
cess or failure of their undertakings not in terms of the total profit 
they bring in but in terms of the rate of profit. 

Two objections are often raised to this picture of Marx's. The 
first is that technological advance does not always involve increas- 
ing the ratio of means of production to workers — that it can be 
"capital saving" rather than "capital intensive". If scientific 
knowledge is progressing and being applied as new technologies, 
then some of these technologies may employ less machinery and 
raw materials per worker than old technologies. At any one time 
there will be some new technologies that are capital-saving. 

This is true. But it does not refute Marx. For there are likely to 
be a greater number of "capital intensive" rather than "capital 
saving" innovations. At any given level of scientific and technical 
knowledge some innovations may indeed be capital-saving. But 
when all these have been employed, there will still be other inno- 
vations (or at least capitalists will suspect there are other 
innovations) to be obtained only by increasing the level of invest- 
ment in means of production. The fact that some technical 
progress can take place without any rise in the ratio of capital to 
labour does not mean that all the advantages of technical progress 
can be gained without such a rise. If an individual capitalist can in- 
crease the ratio of capital to workers he will be able to invest in 


Understanding the System: Marx and Beyond 

and take advantage of innovations that need more capital as well 
as those that do not. If he cannot increase this ratio then he will 
benefit only from those innovations that do not — and he will lose 
out in competition with those who can. Since, in theory at least, 
there is no limit to the possible increase in the ratio of means of 
production to workers, there is no theoretical limit to possible in- 
novation based on this method of competition. 

In the real world, every operating capitalist takes it for 
granted that the way to gain access to the most advanced techni- 
cal change is to increase the level of investment in means of 
production or "dead labour" (including the dead labour accu- 
mulated in the results of past research and development). It is 
only in the pages of the most esoteric journals of political econ- 
omy that anyone imagines that the way for the Ford Motor 
Company to meet competition from General Motors or Toyota is 
to cut the level of physical investment per worker. The capitalist 
usually recognises that you cannot get the benefits of innovation 
without paying for it. 

For these reasons the average amount of means of production 
per worker, Marx's "technical composition of capital", will rise — 
and with it the "organic composition of capital". Only one thing 
could stop the pressure for this rise: if for some reason there was a 
shortage of profit-seeking investment. In such a case the capitalists 
would be forced to forego hopes of achieving the innovations pos- 
sible through greater investment and settle for those they might 
stumble upon by accident. 

The second argument against Marx's account claims that 
changes in technique alone cannot produce a fall in the rate of 
profit. For, it is said, capitalists will only introduce a new technique 
if it raises their profits. But if it raises the profit of one capitalist, 
then it must raise the average profit of the whole capitalist class. 
So, for instance, Ian Steedman states, "The forces of competition 
will lead to that selection of production methods industry by in- 
dustry which generates the highest possible uniform rate of profit 
through the economy". 34 The same point has been accepted by var- 
ious Marxists economists over the last 40 years, for instance by 
Andrew Glyn, 35 Susan Himmelweit, 36 Robert Brenner 37 and Gerard 
Dumenil and Dominique Levy 38 — and has been elaborated mathe- 
matically by Nobuo Okishio. 39 They conclude that capitalists will 
only adopt capital intensive techniques that seem to reduce their 
rate of profit if that rate is already being squeezed either by a rise in 

The Dynamics of the System 


real wages or by external competition. These things, not the or- 
ganic composition of capital, hit the rate of profit. 

Marx's own writings provide a simple answer to any such argu- 
ment: that the first capitalist to invest in a new technology gets a 
competitive advantage over his fellow capitalists which enables 
him to gain a surplus profit, but that this surplus will not last once 
the new techniques are generalised. 

What the capitalist gets in money terms when he sells his goods 
depends upon the average amount of socially necessary labour 
contained in them. If he introduces a new, more productive, tech- 
nique, but no other capitalists do so, he is producing goods worth 
the same amount of socially necessary labour as before, but with 
less expenditure on real concrete labour power. His profits rise. 40 
But once all capitalists have introduced these techniques, the value 
of the goods falls until it corresponds to the average amount of 
labour needed to produce them under the new techniques. The ad- 
ditional profit disappears — and if more means of production are 
used to get access to the new techniques, the rate of profit falls. 41 

The implications of Marx's argument are far reaching. The very 
success of capitalism at accumulating leads to problems for further 
accumulation. Eventually the competitive drive of capitalists to 
keep ahead of other capitalists results in a massive scale of new in- 
vestment which cannot be sustained by the rate of profit. If some 
capitalists are to make an adequate profit it can only be at the ex- 
pense of other capitalists who are driven out of business. The drive 
to accumulate leads inevitably to crises. And the greater the scale 
of past accumulation, the deeper the crises will be. 

The countervailing tendencies 

Marx's theory, it should be stressed, is an abstract account of the 
most general trends in the capitalist system. You cannot draw from 
it immediate conclusions about the concrete behaviour of the 
economy at any individual point in space and time. You have first 
to look at how the general trends interact with a range of other 
factors. Marx himself was fully aware of this, and built into his ac- 
count what he called "countervailing tendencies". Two are of 
central importance. 

First, there is increasing the rate of exploitation. If each worker 
contributes more surplus value this will counteract the fact that 
there are fewer workers per unit of investment. The increased ex- 
ploitation could result from increasing the length of the working 


Understanding the System: Marx and Beyond 

day (Marx's "absolute surplus value"), cutting real wages, in- 
creasing the physical intensity of labour or a fall in the cost of 
providing workers with a livelihood as a result of increased pro- 
ductivity. In this case the capitalist could increase the proportion 
of each individual worker's labour that went into surplus value, 
even if the worker's living standard was not reduced. Such an in- 
crease in the rate of exploitation could counteract some of the 
downward pressures on the rate of profit: the total number of 
workers might not grow as fast as total investment, but each 
worker would produce more surplus value even if he or she did not 
suffer a wage cut or have to work any harder. 

There is, however, a limit to the capacity of this method to 
counter the downward pressure on profit rates — the number of 
hours in the working day. The number of hours per day that go into 
providing for the upkeep of the worker can fall from four to three, 
or from three to two, but it cannot fall below zero! By contrast in- 
vestment in means of production can increase without limit. 42 

Take the example of a firm which employs a static workforce of 
30,000. Even if it worked them as long as was physically possible 
each day (say, 16 hours) and paid them no wages, its daily profit 
could not exceed the value embodied in 30,000 x 16 hours labour. 
This is a limit beyond which profit cannot grow. But there is no 
such limit on the degree to which investment can grow (and with 
such a high level of exploitation there would be an enormous quan- 
tity of old surplus value to be turned into new enlarged investment). 
So a point will be reached where profits stop growing, even though 
competition forces the level of investment to continue rising. The 
ratio of profits to investment — the rate of profit — will tend to fall. 

The second "countervailing factor" is that the increase in the 
productivity of labour means there is a continual fall in the 
amount of labour time — and therefore of value — needed to pro- 
duce each unit of plant, equipment or raw materials. The 
"technical composition of capital" — the physical ratio of factories, 
machines, etc to workers — grows. But the factories, machines and 
so on get cheaper to buy. And so the expansion of investment in 
value terms would be rather slower than the expansion in material 
terms. This would counteract to some extent the tendency for the 
value of investment to outstrip the growth in surplus value. 

There have been claims that this is more than just a "counter- 
vailing tendency" to Marx's law and in fact completely destroys it. 
Critics argue, using mathematical equations provided by Okishio, 

The Dynamics of the System 


that technical progress means that goods are always being pro- 
duced more cheaply than in the past. 43 If a rise in the ratio of dead 
to living labour in a certain industry increases productivity, the 
price of its output will fall compared to the output of other indus- 
tries. But that in turn will reduce the costs of investment in these 
industries and its ratio to labour. Lower investment costs will lower 
the organic composition of capital and raise the rate of profit. 

At first glance the argument looks convincing. It is, however, 
false. It rests upon a sequence of logical steps which you cannot 
take in the real world. Investment is a process of production that 
takes place at one point in time. The cheapening of further invest- 
ment as a result of improved production techniques occurs at a 
later point in time. The two things are not simultaneous. 44 

There is an old saying, "You cannot build the house of today 
with the bricks of tomorrow." The fact that the increase in pro- 
ductivity will reduce the cost of getting a machine in a year's time 
does not reduce the amount a capitalist has to spend on getting it 
today. And if some other capitalist buys the cheaper machine, it 
immediately reduces the value of the machine owned by the first 
capitalist. While the new capitalist might be able to turn out goods 
in a more profitable way, the first capitalist has to deduct from his 
profits the loss in the value of his machine. 45 

When capitalists measure their rates of profit they are compar- 
ing the surplus value they get from running plant and machinery 
with what they spent on acquiring it at some point in the past — not 
what it would cost to replace it today. The point has added impor- 
tance when it is remembered that the real process of capitalist 
investment takes place in such a way that the same fixed constant 
capital (machines and buildings) is used for several cycles of pro- 
duction. The fact that the cost of the investment would be less if it 
took place after the second, third or fourth round of production 
does not alter the cost before the first round of production. 

The alleged disproof of Marx arises, as does the so-called trans- 
formation problem, from applying simultaneous equations to 
processes taking place through time. Simultaneous equations, by 
definition, assume simultaneity, with no passage of time. 

The decline in the value of their invested capital certainly does 
not make life any easier for the capitalists. To survive in business 
they have to recoup, with a profit, the full cost of their past invest- 
ments, and if technological advance means these investments are 
now worth, say, half what they were previously, they have to pay 


Understanding the System: Marx and Beyond 

out of their gross profits for writing off that sum. What they have 
gained on the swings they have lost on the roundabouts, with "de- 
preciation" of capital causing them as big a headache as a 
straightforward fall in the rate of profit. 46 

Capitalism is based not just on value but upon the self -expansion 
of the values embodied in capital. This necessarily implies a com- 
parison of current surplus value with the prior capitalist investment 
from which it flows. The very notion of "self-expanding values" is 
incoherent without it. And the loss of value of the equipment and 
materials of production that have already been paid for is detri- 
mental to the self-expansion of value. 

The fall in the cost of investment might help the new capitalist. 
But he in turn is under pressure from still other capitalists who 
invest after him in still cheaper equipment. And all the time the ex- 
istence of surplus value made in previous rounds of production 
and available for investment in still newer techniques serves to 
push up the ratio of investment to the labour force. 

There is continual growth in the mass of surplus value seeking an 
outlet for investment. The more of this surplus value an individual 
capitalist can get hold of, the bigger the investments he can make 
and the more productivity-increasing innovations he will be able to 
introduce compared to his competitors. A capitalist may be able to 
buy today a machine which is twice as productive as one he paid the 
same price for a year ago. But that is no help to him if a rival is using 
greater accumulated surplus value to buy a machine four times as 
productive. The individual capitalist can stay in business only if he 
spends as much surplus value as possible on new means of produc- 
tion. If the means of production become cheaper, that only results in 
his having to buy more of them in order to achieve competitive suc- 
cess. So long as there is more surplus value available for investment 
than there was previously, the organic composition of capital will 
tend to rise, other things being equal. 47 It makes no difference if the 
physical means and materials of production are cheaper — that just 
causes more of them to be employed. 

Crisis and the falling rate 

But if the depreciation of capital through increased productivity 
cannot by itself save the rate of profit, it can if it is combined with 
something else — the crisis. For the crisis involves some capitals 

The Dynamics of the System 


being made bankrupt. They are then forced to dispose of their cap- 
ital not just at its depreciated value, but for anything they can get, 
however little. The beneficiaries are those capitalists who survive 
the crisis. They can pick up means of production — accumulations 
of value — on the cheap, enabling them to restore their own rates 
of profit. 

In this way depreciation can ease the pressure on the capitalist 
system as a whole, with the burden of paying for it falling on those 
capitalists who were driven out of business, but not on those who 
remained. Those capitalists who die bear many of the costs of de- 
preciation for the system as whole, making it possible for those 
who live on to do so with lower capital costs and eventually higher 
rates of profit than would otherwise be the case. "The crises are 
always but momentary and forcible solutions of the existing con- 
tradictions. They are violent eruptions which for a time restore the 
disturbed equilibrium". 48 

There is a continual double interaction between the long-term 
tendency for the rate of profit to fall and cyclical crises. The rise in 
the ratio of investment to labour employed as new investment 
takes place during periods of expansion exerts a downward pres- 
sure on the rate of profit, just as it is under pressure from rising 
raw material prices and wages. This can have a direct effect, with 
the fall in the rate of profit causing firms to stop investing, so caus- 
ing recession in the capital goods industries which then spreads 
elsewhere. Or it can happen indirectly if firms are successful in 
protecting the rate of profit temporarily by forcing down real 
wages. In that case, firms in the consumer goods industries cannot 
sell all their goods — or, as Marx puts it, they cannot "realise the 
surplus value" that they have exploited — and their profits fall, 
again producing recession. 49 

But the crisis in turn leads to some firms going bust and pro- 
vides opportunities for other firms to buy up their equipment 
and raw material and take on workers at lower wages. If enough 
firms go bust, the crisis itself can work to completely counteract 
the long-term downward tendency of the rate of profit. In short, 
the decline in the rate of profit helps produce the cyclical crisis, 
but the cyclical crisis helps resolve the long-term decline in the 
rate of profit. 

Marx's account of the falling rate of profit was not published 
until 11 years after his death and did not have a big impact on the 
analyses of his followers in the next two decades. It barely featured 


Understanding the System: Marx and Beyond 

in the most important works of Marxist analysis by Rosa 
Luxemburg, Vladimir Lenin and Nicolai Bukharin. It was ac- 
cepted by Rudolf Hilferding but was not central to his analysis. 50 It 
was not until the 1920s that a concerted attempt was made to use 
it to analyse the long term trajectory of the system by the Polish- 
Austrian Marxist Henryk Grossman. He was reacting to the 
propensity of many Marxists to deny that capitalism was in- 
evitably heading to a great crash, a "breakdown". He took up the 
argument in the form in which it had been put by the Austrian 
social democrat Otto Bauer, who claimed to show that capitalism 
could expand indefinitely, using schema from Marx in Volume 
Two of Capital depicting the interrelation between different sec- 
tors of capitalist production. 51 

Grossman claimed to prove, as against Bauer, that if these 
schema were applied over a sufficiently large number of cycles of 
production a point would be reached at which the rate of profit 
would be too low to allow production to continue without cutting 
into workers' real wages and the consumption of the capitalist 
class itself. This would happen because "the scope of accumula- 
tion expands... in proportion to the weight of the already 
accumulated capital" even as the rate of profit tends to decline. 
Eventually a point would be reached where sustaining accumula- 
tion absorbed all existing surplus value, leaving none for the 
luxury consumption of the capitalist class, and then beginning to 
eat into the value needed to sustain the working class. 52 

Alternatively, if surplus value was used on an increasing scale to 
maintain the rate of profit on existing investment, there would be 
a collapse in the mass of surplus value available for new invest- 
ment. The industries catering for investment would not be able to 
function. There would be "absolute over-accumulation" and "a 
state of capital saturation in which the over-accumulated capital 
faces a shortage of investment opportunities and finds it more dif- 
ficult to surmount this saturation". 53 In either case the system 
would no longer be able to reproduce itself. 

There have been many objections to Grossman's arguments. 54 It 
is not clear from his argument why the rate of expansion of in- 
vestment has to remain constant from one cycle to another, rather 
than slowly decline in response to the decline in the rate of profit 
and in doing so reduce the tendency of the organic composition of 
capital to rise. In that case the "breakdown", it might seem, could 
be postponed for a very long time. Further, Grossman's book is 

The Dynamics of the System 


ambiguous about whether his theory proves the inevitability of 
crisis or the inevitability of a complete breakdown of the system. 
He recognises that the crisis can counteract the tendency of the 
rate of profit to fall, but still concludes that: 

the mechanism as a whole tends relentlessly towards its final 
end with the general process of accumulation... Once these 
counter-tendencies are themselves defused or simply cease to 
operate, the breakdown tendency gains the upper hand and as- 
serts itself in the absolute form of the final crisis. 55 

Yet it is possible to see hypothetical circumstances in which 
Grossman's arguments would apply. Intense competition between 
capitals — itself intensified by falling profit rates — could compel 
each to invest in ever more expensive means of production so as to 
obtain the advanced technology that is a precondition for survival. 
In this way the technical prerequisites of successful competition 
would contradict the possibility of maintaining profitability; the 
embodiment of capital in certain use values would contradict the 
possibility of expanding its value. Resistance from the working 
class could prevent restoration of profit rates through the method 
of paying for labour power at below its reproduction costs. And 
something might prevent the usual boom-recession cycles from 
driving some firms out of business and easing the long-term prob- 
lems of others. Grossman's theory can then show how the falling 
rate of profit can produce deep problems for the system, without 
being treated as definitive proof that capitalism has to collapse of 
its own accord. 

The concentration and centralisation of capital 

The second long-term process recognised by Marx was what he 
called the "concentration and centralisation" of capital. 56 It is not 
difficult to grasp what is involved. Concentration refers to the way 
in which exploitation enables individual capitals to accumulate 
and so grow larger. The small firm becomes a big firm and the big 
firm becomes a giant — providing it can survive each cyclical crisis. 
Centralisation refers to the way in which each crisis weeds out 
some capitals, leaving those that remain controlling a bigger part 
of the whole system. 


Understanding the System: Marx and Beyond 

This process has important implications — not all of which were 
fully drawn out by Marx himself. The bigger the individual units 
of capital and larger the proportion of the system as a whole they 
constitute, the greater will be the impact on the rest of the system 
every time one of them goes bust. If a small firm stops making 
profits and goes bust, this will destroy only a small part of the 
market for other, previously profitable, small firms that supply it. 
There will be a very limited domino effect. If, however, one of the 
giants of the system goes bust, it can have a devastating impact on 
other previously profitable big firms that depended on it for their 
own markets, and on any banks or other firms that have lent it 
money. The domino effect becomes an avalanche effect. 

At the same time, however, the very size of firms can provide 
them with protection from market forces up to a certain point. 
The individual acts of labour within a great capitalist enterprise 
are not directly in competition with individual acts outside it. 
Instead managerial decisions determine how they relate to each 
other. As Marx puts it: 

In manufacture... the collective working organism is a form of 
existence of capital. The mechanism that is made up of numer- 
ous individual detail labourers belongs to the capitalist... 
Manufacture proper not only subjects the previously indepen- 
dent workman to the discipline and command of capital, but, in 
addition, creates a hierarchic gradation of the workmen them- 
selves... Not only is the detail work distributed to the different 
individuals, but the individual himself is made the automatic 
motor of a fractional operation... 57 

The great enterprises are like islands within the system where the 
relation between the work done by individuals is organised by a 
plan, not by the interrelation of their products through the market: 

What... characterises division of labour in manufactures? The 
fact that the detail labourer produces no commodities. It is only 
the common product of all the detail labourers that becomes a 
commodity. Division of labour in society is brought about by 
the purchase and sale of the products of different branches of 
industry, while the connexion between the detail operations in a 
workshop is due to the sale of the labour power of several 
workmen to one capitalist, who applies it as combined labour 

The Dynamics of the System 


power... While within the workshop, the iron law of propor- 
tionality subjects definite numbers of workmen to definite 
functions; in the society outside the workshop, chance and 
caprice have full play in distributing the producers and their 
means of production among the various branches of industry. 58 

The islands of planning within the enterprises do not exist apart 
from the sea of commodity production around them. The internal 
regime is a response to the external pressure to extract and accu- 
mulate surplus value in order to compete: "Anarchy in the social 
division of labour and despotism in that of the workshop are 
mutual conditions the one of the other". 59 The despotism arises 
from the pressure on the capitalist to relate the productivity of 
labour within the enterprise to the ever changing productivity of 
labour in the system as a whole. But this cannot be done without 
using compulsion, pressing down on each worker, to achieve what 
is brought about in the wider society by the blind interplay of com- 

The law of value operates between enterprises through the 
market. Within the enterprise it has to be imposed by conscious 
regulation on the part of the capitalist. Planning within capitalism 
is not the opposite of the market; it is the way in which the capital- 
ist tries to impose the demands of the market on the workforce. 60 

The capitalist can often still have a certain leeway within which 
to operate. The enterprise can make profits if the market for its 
output is growing rapidly despite costs of production internally de- 
parting markedly from those currently prevailing in the system as a 
whole. Things are similar when it has gained a major share of the 
market in a sector of production that requires very large amounts 
of fixed capital. The production methods associated with the phys- 
ical structure of its fixed capital (its use value) can be much more 
costly than those available in the system as whole (eg when old ma- 
chines using many workers are used), but the enterprise is protected 
from serious competition for a long period of time by the sheer cost 
to new firms of entering the industry to compete with it. The exis- 
tence of a certain capital as a fixed, physically constituted use value 
as well as a potentially fluid exchange value means that the law of 
value does not apply to it directly and instantaneously. 

This is not a state of affairs that can last indefinitely. Eventually 
the development of new, more advanced production methods in 
the wider system will lead to it facing sudden serious competition. 


Understanding the System: Marx and Beyond 

It is then, through the impact of crisis on it, that the enterprise is 
forced to restructure so as to produce according to the law of value 
or to go under. The more enterprises there are that have been rela- 
tively protected in the past — that is, the higher the concentration 
and centralisation of capital — the greater will be the crisis when it 
eventually breaks. 

But in the interim the giant firm can evade the crisis — and some- 
times the interim can be a very long time. If many giant firms are 
able to do this for a period, the impression can arise that that 
system — or part of it — has become crisis free. What is not noticed 
is that the price it pays for avoiding crises is that it is there is no re- 
structuring to offset the long-term downward pressure on 
profitability. Capitals avoid small crises, only to be hit, eventually, 
by a much greater one. 

The other limit of capitalism? 

There is a final point that has often been lost in expositions of 
Marx's ideas: his stress on the expansion of the "forces of produc- 
tion" has been interpreted as identification with economic growth 
at all costs. Yet in both the earlier and the later writings of Marx 
and Engels there is a keen awareness of the contradictory charac- 
ter of such growth within class societies in general and within 
capitalism in particular. They wrote in 1845-6: 

In the development of the productive forces there comes a stage 
when productive forces and means of intercourse are brought 
into being which, under existing relations, can only cause mis- 
chief, and are no longer productive but destructive. 61 

Marx and Engels did not just view capitalism as generally destruc- 
tive. They also provided the outlines of a critique of the particular 
ecological damage wrought by it, as writers like John Bellamy 
Foster have emphasised in recent years. 62 

Marx saw human beings as an integral part of the natural 
world. "Labour", he wrote: 

is, in the first place, a process in which both man and Nature 
participate, and in which man of his own accord starts, regu- 
lates, and controls the material reactions between himself and 

The Dynamics of the System 


Nature. He opposes himself to Nature as one of her own forces, 
setting in motion arms and legs, head and hands, the natural 
forces of his body, in order to appropriate Nature's productions 
in a form adapted to his own wants. 63 

But the drive of capital to create surplus value leads to it undermin- 
ing of the vitality of nature — and the conditions for human life: 

Exploitation and squandering of the vitality of the soil takes 
the place of conscious rational cultivation of the soil as eternal 
communal property, an inalienable condition for the existence 
and reproduction of a chain of successive generations of the 
human race. 64 

There arises "an irreparable break in the coherence of social in- 
terchange prescribed by the natural laws of life". 65 "Capitalist 
production develops technology, and the combining together of 
various processes into a social whole, only by sapping the original 
sources of all wealth — the soil and the labourer..." 66 Just as 
"large-scale industry... lays waste and destroys... labour-power", 
"large-scale mechanised agriculture... directly exhausts the nat- 
ural vitality of the soil..." 67 Capitalist production, Marx 
recognised, was slowly destroying the very basis on which it, like 
all human production, rested — the metabolic interaction between 
humanity and the rest of the natural world. 

Marx's remarks were mainly concerned with the immediate ef- 
fects of capitalist agriculture on soil fertility, which in his time 
could only be overcome by the use of guano — nitrous mineral de- 
posits resulting from thousands of years of bird droppings to be 
found mainly on the coast of northern Chile. Marx's insights were 
taken up and developed in this sense by Karl Kautsky in the 
1890s as implying a crisis of food production in the short term. 
But they seemed to lose their relevance with the discovery of how 
nitrous fertilisers could be made artificially (through the Haber- 
Bosch process) during World War One and world food 
production was able to expand without difficulty throughout the 
20th century. But analyses of the relation between humanity and 
nature had wider implications than a simple concern with food 
output, as was spelt out by Engels in his manuscript The 
Dialectics of Nature, which was not published until 30 years after 
his death, in the mid-1 920s. 


Understanding the System: Marx and Beyond 

Here Engels noted that, although humans differ from other an- 
imals in being able to "master" nature, this historically has often 
had unforeseen negative consequences which cancelled out initial 
gains. He took as an example the way in which deforestation had 
wreaked havoc on Greece, Mesopotamia and Asia Minor: 

Thus with every step we are reminded that we by no means rule 
over nature as over a foreign people, like someone standing out- 
side nature — but that we, with flesh and blood and brain, 
belong to nature and exist in its midst. 68 

Scientific progress was slowly providing the means to avoid 
causing ecological calamities by controlling and regulating "pro- 
duction activity". But "this regulation" required "something 
more than mere knowledge". It required "a complete revolution 
in our hitherto existing mode of production, and simultaneously 
a revolution in our whole contemporary social order". 69 This was 
necessary because: 

The individual capitalists, who dominate production and ex- 
change, are able to concern themselves only with the most 
immediate useful effect of their actions... In relation to nature, 
as to society, the present mode of production is predominantly 
concerned only about the immediate, the most tangible result; 
and then surprise is expressed that the more remote effects of 
actions directed to this end turn out to be quite different, are 
mostly quite the opposite in character. 70 

The implication is that capitalism contained another inbuilt limit 
besides that of its inbuilt tendency to economic crises. It is that left 
to itself it could eventually destroy the very environmental condi- 
tions for any form of human existence, including its own. Neither 
Marx nor Engels developed this implication. But it would become 
very important a century later. 

A dynamic and contradictory system 

The recognition that capitalism is an ever expanding system of 
alienated labour runs through the pages of Marx's economic writ- 
ings. It is a system in which people's living force is taken from them 

The Dynamics of the System 


and turned into a system of things that dominate them. Capital is 
labour that is transformed into a monstrous product whose only 
aim is to expand itself: "Capital is dead labour, that, vampire-like, 
only lives by sucking living labour, and lives the more, the more 
labour it sucks". 71 It is this which gives capitalism a dynamic of 
growth unparalleled in previous societies. 

The endless drive to pump out surplus value in order to further 
pump out yet more surplus value, of accumulation in order to fur- 
ther accumulate, knows no bounds. As capitalism emerged in 
parts of north west Europe, it was compelled to stretch out its ten- 
tacles to encompass the whole earth, subjecting ever more living 
labour to it: 

The need of a constantly expanding market for its products 
chases the bourgeoisie over the entire surface of the globe. It 
must nestle everywhere, settle everywhere, establish connections 
everywhere. The bourgeoisie has through its exploitation of the 
world market given a cosmopolitan character to production and 
consumption in every country. To the great chagrin of reaction- 
ists, it has drawn from under the feet of industry the national 
ground on which it stood. All old-established national industries 
have been destroyed or are daily being destroyed. They are dis- 
lodged by new industries, whose introduction becomes a life and 
death question for all civilised nations, by industries that no 
longer work up indigenous raw material, but raw material 
drawn from the remotest zones; industries whose products are 
consumed, not only at home, but in every quarter of the globe. In 
place of the old wants, satisfied by the production of the country, 
we find new wants, requiring for their satisfaction the products 
of distant lands and climes. In place of the old local and national 
seclusion and self-sufficiency, we have intercourse in every direc- 
tion, universal interdependence of nations. 72 

What stands out from Marx's analysis is precisely what has been 
missing from mainstream economics since his time — a sense of the 
mass forward rush of capitalism. 73 His model provides, as no other 
has, an account of a system that had expanded to fill most of 
Western Europe and North America by the time of his death in 
1883 — and expanded further to fill the whole globe in the 20th cen- 
tury. But that is not all. His model was not only of a self-expanding 
system, but of one whose expansion is based upon the interplay of 


Understanding the System: Marx and Beyond 

contradictory forces that finds expression in the crisis and the 
downward pressure on the rate of profit. The expansion of the 
system simultaneously leads to a massive growth in the productive 
forces — the capacity of humanity to produce its livelihood — and of 
the transformation of these into destructive forces through the crip- 
pling of people's lives. 

Capitalism has been a totalising — I am tempted to write 
"totalitarian" — system, in a way in which no previous mode of 
production had been, compelling the whole world to dance to its 
frenzied rhythms of competiton and accumulation. As it has done 
so, the system as a whole has continually reacted back upon the in- 
dividual processes on which it depends. It forces each capital to 
force down the price of labour power to the minimum that will 
keep its workers able and willing to work. 74 The clash of capitals 
compels each to accumulate in a way that will produce downward 
pressure on profit rates for all of them. It stops any of them stand- 
ing still, even if they occasionally become aware of the devastation 
they are causing. It is a system that creates periodic havoc for all 
those who live within it, a horrific hybrid of Frankenstein's mon- 
ster and of Dracula, a human creation that has escaped control 
and lives by devouring the lifeblood of its creators. 

It is this understanding which above all distinguishes Marx's ap- 
proach from every school of mainstream economics, orthodox and 
heterodox alike, and which means it alone provides a guide for 
analysing capitalism in our century. But doing so means using 
Marx's concepts to go beyond Marx. 

The Dynamics of the System 



Beyond Marx: Monopoly, 
War and the State 

New developments 

Marx depicted a system that was very dynamic, but also plagued 
with seemingly insuperable contradictions. Its very dynamism con- 
tinually led capital to try to expand at a greater rate than could be 
sustained by the living labour power on which it ultimately de- 
pended. The barrier to capitalist production, Marx wrote, lay in 
capital itself. The implication was that as capitalism engulfed the 
whole world, it would be subject to longer and deeper slumps, in- 
terspersed with shorter and shallower periods of boom. At the 
same time, the concentration and centralisation of capital would 
produce an ever greater polarisation between a capitalist class 
which was diminishing in size and a working class that absorbed 
into itself the rest of society. 

The model was by design an abstraction. Marx consciously ig- 
nored much of the day to day functioning of markets and many of 
the features of particular capitalist societies in his attempt to grasp 
the underlying tendencies built into the mode of production as 
such — its "general laws". The way each of the three volumes of 
Capital operated at a different level of abstraction meant that the 
third volume, by integrating production and circulation, was closer 
to the actual operating detail of any really existing capitalist soci- 
ety than the first volume, even though its analysis depended on the 
basic concepts developed there. It dealt not only with the equalisa- 
tion of profit rates, the deviation of prices from values, crises and 
the tendency of the rate of profit to fall, but also with credit and the 
banking system, commercial profits, interest payments to money 
lenders and rents to land owners. But even the third volume delib- 
erately paid little attention to many important things: foreign trade, 


the impact on the capitalist system of absorbing the still enormous 
pre-capitalist parts of the world or the role of the state. Marx had 
intended in the original plan for Capital he drew up in the early 
manuscripts of the work further volumes dealing with such things. 
But he never had time to do so, immersed as he was in day to day 
revolutionary political activity, compelled to make a livelihood for 
himself through journalistic articles and, in the last years of his life, 
plagued by illness, although the three volumes he did fully or par- 
tially complete were themselves an incredible achievement. 

The gap between the model and the reality left many questions 
unanswered about the course capitalism would take. These ques- 
tions did not necessarily seem to matter that much either to Marx 
and Engels or to the activists in the new workers' movements of the 
1870s and 1880s. These were the years of a long period of crises 
known as the Great Depression. The US steel magnate Andrew 
Carnegie expressed the mood even in capitalist circles in 1889: 

Manufacturers... see savings of many years... becoming less and 
less, with no hope of a change in the situation. It is in a soil thus 
prepared that anything promising of relief is gladly welcomed. 
The manufacturers are in the position of patients that have tried 
in vain every doctor of the regular school for years, and are now 
liable to become the victim of any quack that appears... 1 

A quarter century of falling profit rates 2 led to massive pools of 
poverty in London and other cities and to mass unemployment in 
the mid-1 8 80s. 3 It was not surprising that Frederick Engels could 
feel that the logic of Marx's model was working itself out right in 
front of his eyes in England as "the decennial cycle of stagnation, 
prosperity, overproduction and crisis" seemed to give way to "a 
permanent and chronic depression". 4 

The trajectory of capitalism soon, however, proved to be more 
complicated than the experience of the 1880s suggested. Profit 
rates recovered in Britain in the 1890s, and the US and Germany 
went through a new wave of economic expansion. 5 There were 
certain positive reforms for workers that seemed to contradict 
Marx's picture: Otto von Bismarck granted pensions to Germany's 
workers in 1889 and a British Liberal government produced a sim- 
ilar scheme in Britain 20 years later, along with free school meals; 
real wages rose in the last two decades of the 19th century, even if 
they tended to stagnate after that; 6 working hours everywhere 


Understanding the System: Marx and Beyond 

tended to fall from 12 or 14 hours a day to eight, and the working 
week to fall from six days to five and a half. 7 

The apparent refutation of the predictions drawn from Marx's 
model led to a crisis within Marxist ranks, known as the revision- 
ist controversy. Out of it emerged two very different trends in the 
analysis of capitalism which were to confront each other again and 
again over the next century. 

Edward Bernstein, only a few years previously a close collabo- 
rator of Engels, produced a root and branch critique of Marx's 
methods and conclusions. "Signs of an economic worldwide 
crash of unheard of violence have not been established", he 
wrote. "Overproduction in single industries does not mean gen- 
eral crises". 8 "Workingmen", he concluded, are not "universally 
pauperised as was set out in the Communist Manifesto" . 9 These 
changes, he argued, had arisen because of "the enormous exten- 
sion of the world market" and the regulation of production with 
"the rise of the industrial cartels" so that "general commercial 
crises" were "improbable". 

Bernstein's "revision" of Marx was rejected by Engels' other col- 
laborator, Karl Kautsky. But this did not prevent many socialist 
activists coming to accept in practice that capitalism had stabilised 
itself for the indefinite future. Challenging such views meant going 
further than Kautsky and adding to Marx's analysis. It is this 
which, each in their own way, Rudolf Hilferding, Vladimir Lenin, 
Nicolai Bukharin and Rosa Luxemburg tried to do. 

Soon it was not only the purely economic functioning of the 
system that required something more than the basic account pro- 
vided by Marx. So too did a new period of immense political 
convulsions as 44 years of peace in western Europe gave way to 
the most horrific war humanity had yet known. 

Hilferding: finance capitalism and imperialism 

The first Marxist economist to publish a detailed analysis of the 
changes was the Austrian Rudolf Hilferding in his work Finance 
Capital, in 1910. Basing himself on developments in Germany, he 
argued that banking capital and industrial capital were merging to 
produce a synthesis of the two, which he labelled "finance capi- 
tal". On this basis giant trusts and cartels were emerging that 
could dominate whole sectors of industry: 

Beyond Marx: Monopoly, War and the State 


There is a continual tendency for cartelisation to be extended. 
The individual industries become increasingly dependent upon 
the cartelised industries until they are finally annexed by them. 
The ultimate outcome of this process would be the formation of 
a general cartel. The whole of capitalist production would then 
be consciously regulated by a single body which would deter- 
mine the volume of production in all the branches of industry. 10 

Hilferding did not see competition as disappearing completely. He 
emphasised the importance of international competition, pointing 
to the way the merger of finance and industry inside a country led 
to pressure on its state to use protectionist tax duties to aid its cap- 
italists in their struggle against rivals in the world market. "It is 
not free trade England, but the protectionist countries, Germany 
and the United States, which become the models of capitalist de- 
velopment", wrote Hilferding. 11 Far from continuing with the 
traditional liberal notion of a minimal "night-watchman state" the 
great trusts wanted it to have the power to widen its boundaries so 
as to enlarge the market in which they could gain monopoly prof- 
its: "While free trade was indifferent to colonies, protectionism 
leads directly to a more active colonial policy, and to conflicts of 
interest between different states", 12 Hilferding argued. "The policy 
of finance capital is bound to lead towards war". 13 

This analysis went beyond anything in Marx. He had witnessed 
the wars of his lifetime and written about them: the opium wars of 
Britain against China, the Crimean War, the American Civil War 
and the Franco-Prussian War. But these were wars, as he saw it, re- 
sulting from the drive of capitalism to impose itself on the 
remnants of the pre-capitalist world around it. Capitalism had 
come into the world "mired in blood", but Marx's model con- 
tained no more than a few hints as to why fully established 
capitalist countries would be driven to war with each other. 
Hilferding had taken a first step towards a Marxism for the 20th 
century that explained what had changed since Marx's time in this 
all-important respect. 

There were, however, ambiguities in Hilferding's approach. The 
main trend in his book was to argue that the growth of monopolies 
did not do away with the tendency of capitalism to crisis, and their 
growing reliance on the state would lead to intensified international 
competition, imperialism and the drive to war. But at points there 
were suggestions that pointed to a very different conclusion — that 


Understanding the System: Marx and Beyond 

the monopolies and the state could work together to dampen the 
tendency towards crisis: "The specific character of capital is oblit- 
erated in finance capital" which was able to resolve "more 
successfully the problems of the organisation of the social econ- 
omy", even though it was still a class society, with "property 
concentrated in the hands of a few giant capitalist groups". 14 This 
meant the mitigation of the old style economic crisis: 

As capitalist production develops, there is therefore an in- 
crease... in the part of production that can be carried on under 
all circumstances. Hence the disruption of credit need not be as 
complete as in crises in the earlier period of capitalism. 
Furthermore, the development of the credit crisis into a bank- 
ing crisis on the one side and a monetary crisis on the other is 
made more difficult... 15 

The mass psychoses which speculation generated at the be- 
ginning of the capitalist era... seem gone for ever. 16 

Hilferding did not carry his argument through to its logical con- 
clusion in Finance Capital, and still wrote that the system could 
not do away with "the cyclical alternation of prosperity and de- 
pression". 17 But by the 1920s, when he served as a minister in two 
Weimar Republic governments, he veered towards Bernstein's ap- 
proach with a theory of "organised capitalism" in which the 
anarchy of the market and the trend towards crisis disappear. 18 
One corollary was to deny that there was anything in capitalism 
inevitably leading to war, since the "organised capitalisms" in dif- 
ferent countries would want to cooperate with each other. 

A similar conclusion had already been reached in 1914 by Karl 
Kautsky, leading him too to a position that barely differed in prac- 
tice from Bernstein's. But where Hilferding pointed to the merger 
of finance and productive capitalism, Kautsky's argument rested 
on seeing a fundamental distinction and antagonism of interests 
between them: 

The finance capitalists... had a direct interest in transforming 
each national state into an apparatus of support for their own 
expansion. Imperialism was therefore directly linked to finance 
capitalism. But the interests of finance capital were not identical 
to those of industrial capital, which could expand only by broad- 
ening its markets through free trade. It was from the industrial 

Beyond Marx: Monopoly, War and the State 


sector that impulses towards international concord arose in the 
bourgeois camp... Imperialism, the expression of one phase of 
capitalist development and the cause of armed conflicts, was not 
the only possible form of development of capitalism. 19 

Kautsky stressed the role of arms firms in particular as having an 
interest in imperialism and war. But he maintained that the eco- 
nomic costs of rearmament, while they favoured the development 
of some sectors of industry, were detrimental to others. Capital in 
the industrial countries needed to dominate the "agricultural" 
countries in order to get raw materials. But there was no reason 
why capitalists should not be able to cooperate to do this through 
a "sort of super-imperialism". 20 

In holding that the drive to war was something that happened 
despite the interests of most capitalists, Hilferding and Kautsky 
were articulating a view very similar to that of some liberals. One 
was the influential economist Hobson, who had produced his own 
theory of imperialism some eight years before Hilferding. He saw 
imperialism as the product of one interest group, those connected 
with certain financial institutions. 21 These opted for guaranteed re- 
turns of interest on overseas loans rather than taking the risks 
involved in industrial investment at home, and welcomed colonial 
expansion as a way of making sure their state guaranteed the safety 
of their investments. So for Hobson the root of imperialism lay not 
with capitalism as such but with finance capital and those he saw as 
benefitting directly from it — the bond-holding rentiers who re- 
ceived their dividends regularly without ever having to worry 
themselves with productive or commercial activity of any sort. 

Another British liberal, Norman Angell, argued a similar posi- 
tion, identifying an essentially peaceful dynamic in capitalism, 
although ascribing a more benign role to finance — no doubt influ- 
enced by the unhesitating way the central banks of France and 
Germany had sent gold to help Britain, and Russia had then sent 
gold to help Germany, during the major financial crisis of 1907. 22 
"In no department of human activity", he wrote, "is internation- 
alisation so complete as in finance. The capitalist has no country, 
and he knows, if he be of the modern type, that arms and con- 
quests and jugglery with frontiers serve no ends of his..." 23 

Such arguments have percolated down through the years to 
the present day. So the former revolutionary Marxist Nigel 
Harris argues that "business has in general no more power over 


Understanding the System: Marx and Beyond 

governments than populations" and the threat to the world comes 
not from untrammelled capitalism but from the states which guard 
their own interests. 24 Ellen Wood is still a militant Marxist, but her 
arguments are not that different. She has criticised what she calls 
"classical-Marxist theories of imperialism" of the First World War 
years for failing to see that the "'political' form of imperialism, in 
which exploitation of colonial peoples and resources depends on 
political domination and control of territory", is "the essence of 
pre-capitalist empires". 25 "Capitalist class exploitation", she in- 
sists, is a "purely economic process which, like capitalist class 
relations, concerns the commodity market". 26 From this it follows 
that, while capitalism needs a state to exert control over society, it 
does not need states that enter into conflict with each other. Much 
the same argument is put by Michael Hardt and Toni Negri in 
their book Empire. Hardt wrote shortly before the US invasion of 
Iraq that the "elites" behind the decision to go to war "are inca- 
pable of understanding their own interests". 27 

The classical theory of imperialism 

Writing in the middle of the First World War, Nicolai Bukharin 28 
and Vladimir Lenin 29 drew very different conclusions. They began 
with Hilferding's description of the integration of banking capital, 
industrial capital and the state, but removed from it any sense of 
the result being harmonious by stressing the way in which the role 
of the state in international economic competition led to war. 

This was the overriding theme of Lenin's pamphlet Imperialism. 
Its aim was to be a "popular outline", showing how the resort to 
war was a product of the "latest stage of capitalism" — the origi- 
nal subtitle to the work: 

Half a century ago, when Marx was writing Capital, free com- 
petition appeared to the overwhelming majority of economists 
to be a "natural law"... Marx had proved that free competition 
gives rise to the concentration of production, which, in turn, at 
a certain stage of development, leads to monopoly... 

This is something quite different from the old free competi- 
tion between manufacturers... producing for an unknown 
market. Concentration has reached the point at which it is pos- 
sible to make an approximate estimate of all sources of raw 

Beyond Marx: Monopoly, War and the State 


materials (for example, the iron ore deposits) of a country and 
even... of the whole world... These sources are captured by gi- 
gantic monopolist associations... The associations "divide" 
them up amongst themselves by agreement. 30 

Once this stage is reached, competition between the giant corpo- 
rations is no longer based simply — or even mainly — on the old 
purely market methods. Taking control of raw materials so that 
rivals cannot get them, blocking rivals' access to transport facili- 
ties, selling goods at a loss so as to drive rivals out of business 
denying them access to credit, are all methods used. "Monopolies 
bring with them everywhere monopolist principles: the utilisation 
of 'connections' for profitable deals takes the place of competition 
in the open market". 31 

The capitalist powers had partitioned the world between 
them, building rival colonial empires, on the basis of "a calcula- 
tion of the strength of the participants, their general economic, 
financial, military and other strength." But "the relative strength 
of these participants is not changing uniformly, for under capi- 
talism there cannot be an equal development of different 
undertakings, trusts, branches of industry or countries". A parti- 
tion of the world that corresponded to the relative strength of the 
great powers at one point no longer did so a couple of decades 
later. The partitioning of the world gives way to struggles over 
the repartitioning of the world: 

Peaceful alliances prepared the ground for wars and in their 
turn grow out of wars. One is the condition for the other, giving 
rise to alternating forms of peaceful and non-peaceful struggle 
on one and the same basis, that of imperialist connections and 
interrelations of world economics and world politics. 32 

The epoch of the latest stage of capitalism shows us that cer- 
tain relations between capitalist associations grow up, based on 
the economic division of the world; while parallel to and in con- 
nection with it, certain relations grow up between political 
alliances, between states, on the basis of the territorial division 
of the world, of the struggle for colonies, of the "struggle for 
spheres of influence". 33 

Britain and France had been able to build great empires, dividing 
Africa and much of Asia between them. The Netherlands and 


Understanding the System: Marx and Beyond 

Belgium controlled smaller but still enormous empires in Indonesia 
and the Congo. By contrast, Germany had only a few relatively 
small colonies, despite its economy beginning to overtake that of 
Britain. It was this discrepancy that lay behind the repeated clashes 
between the rival alliances of great power that culminated in the 
First World War. 

Finally, where Kautsky focused simply on the control of the 
"agrarian" parts of the world (what today would be called the 
Third World or the Global South), Lenin was insistent that the im- 
perialist division of the world was increasingly centred on 
industrial areas. "The characteristic feature of imperialism is pre- 
cisely that it strives to annex not only agrarian territories, but even 
most highly industrialised regions (German appetite for Belgium; 
French appetite for Lorraine)". 34 

Bukharin's Imperialism and World Economy, written shortly 
before Lenin's work, but appearing afterwards with an introduc- 
tion by Lenin, made the argument just as forcefully as he draws of 
the consequences of the tendencies that Hilferding had described: 

Combines... in industry and banking... unite the entire "na- 
tional" production, which assumes the form of a company of 
companies, thus becoming a state capitalist trust. 
Competition... is now competition of the state capitalist trusts 
on the world market... Competition is reduced to a minimum 
within the boundaries of the "national" economies, only to flare 
up in colossal proportions, such as would not have been possi- 
ble in any of the preceding historical epochs... The centre of 
gravity is shifted in the competition of gigantic, consolidated 
and organised economic bodies possessed of a colossal fighting 
capacity in the world tournament of "nations"... 35 

Writing three years after the end of the war, he drew out the impli- 
cations even more sharply: 

The state organisation of the bourgeoisie concentrates within 
itself the entire power of this class. Consequently, all remain- 
ing organisations... must be subordinated to the state. All are 
"militarised"... Thus there arises a new model of state power, 
the classical model of the imperialist state, which relies on state 
capitalist relations of production. Here "economics" is organ- 
isationally fused with "politics"; the economic power of the 

Beyond Marx: Monopoly, War and the State 


bourgeoisie unites itself directly with the political power; the 
state ceases to be a simple protector of the process of exploita- 
tion and becomes a direct, capitalist collective exploiter... 36 

War now becomes central to the system, arising from the competi- 
tion between the "state capitalist trusts", and also feeding back 
into and determining their internal organisation: 

With the formation of state capitalist trusts, competition is 
being almost entirely shifted to foreign countries. The organs of 
the struggle waged abroad, primarily state power, must there- 
fore grow tremendously... In "peaceful" times the military state 
apparatus is hidden behind the scenes where it never stops func- 
tioning; in war times it appears on the scene most directly. . . The 
struggle between state capitalist trusts is decided in the first 
place by the relation between their military forces, for the mili- 
tary power of the country is the last resort of the struggling 
"national" groups of capitalists... Every improvement in mili- 
tary technique entails a reorganisation and reconstruction of the 
military mechanism; every innovation, every expansion of the 
military power of one state, stimulates all the others. 37 

The logic of the argument presented by Lenin and Bukharin was 
that the period of peace that followed the First World War would, 
sooner rather than later, give way to a new world war unless capi- 
talism was overthrown. "The possibility of a 'second round' of 
imperialist war is... quite obvious", wrote Bukharin. 38 As we shall 
see later, the reaction of the great capitalist powers to the economic 
crisis that began in 1929 confirmed this prediction. That has not, 
however, stilled the argument against the Lenin -Bukharin account. 

The economics of empire 

This argument assumed — and still assumes 39 — that peaceful free 
trade rather than a militaristic struggle to control chunks of terri- 
tory would have been the most profitable course for the majority of 
capitalists to pursue. This claim is easy to deal with. The great 
period of growth of the Western empires was the last quarter of the 
19th century. In 1876 no more than 10 percent of Africa was under 
European rule. By 1900 more than 90 percent was colonised. In the 


Understanding the System: Marx and Beyond 

same period Britain, France, Russia and Germany each established 
colonial enclaves and wide spheres of influence in China; Japan 
took over Korea and Taiwan; France conquered all of Indochina; 
the US seized Puerto Rico and the Philippines from Spain; and 
Britain and Russia agreed to an informal partitioning of Iran. 

At the same time there was a massive growth in the export of 
capital from Britain, still the biggest capitalist economy and the 
centre of the world financial system, even if the US and Germany 
were rapidly catching up in industrial output. Total British invest- 
ment in foreign bonds rose from £95 million in 1883 to £393 
million in 1889. It soon equalled 8 percent of Britain's gross na- 
tional product and absorbed 50 percent of savings. 40 Not all 
exports of capital, let alone of goods, went to the colonies. Much 
went to the US and quite a lot went to Latin American countries 
like Argentina. But the colonies were important. Britain's biggest 
colony, India, alone accounted for 12 percent of exported goods 
and 11 percent of capital exports; it also provided a surplus to 
Britain's balance of payments that could help pay for investments 
elsewhere in the world; and it provided Britain, free of charge, 
with an army for conquering other places. 41 The raw materials re- 
quired for the most technologically advanced industries of the time 
came from colonial areas (vegetable oils for margarine and soap 
manufacture, copper for the electrical industry, rubber and oil for 
the fledgling automobile industry, nitrates for fertilisers and ex- 
plosives). On top of this, there was the strategic importance of the 
colonies. What mattered for both politicians and industrial inter- 
ests was that "Britain ruled the waves" and could use its bases in 
the colonies to punish states that threatened those interests. 

It hardly seemed a coincidence to the theorists of imperialism 
that the decades which witnessed this massive expansion of coloni- 
sation, of exports of capital and of extraction of raw materials also 
saw the recovery of profitability and markets from the gloom of 
the Great Depression. They may not always have managed to the- 
orise this clearly, but the coincidence of empire and capitalist 
boom was real enough. 

The Lenin-Bukharin theory therefore stands up as an account 
of the pre-World War One decades — and of the drive to war. 
Nevertheless, there was a weakness in Lenin's version of the 
theory. It generalised from the experience of British imperialism 
at the end of the 19th century to the whole of imperialism, and 
tended to make the entire theory rest upon the key role of the 

Beyond Marx: Monopoly, War and the State 


banks in exporting financial capital. But this did not fit with the 
picture even when Lenin was writing, let alone in the decades af- 
terwards. The export of finance had indeed been a central feature 
of British imperialism, but the situation was rather different with 
its new competitors. In the German case it was the industrial com- 
bines, especially those in heavy industry, rather than finance as 
such, that sought to expand beyond national frontiers by the es- 
tablishment of colonies and spheres of influence. And the 
characteristic feature of the US and Russian economies in the pre- 
First World War decades was not the export of capital but the 
inflow of funds from other capitalist countries (although there 
was some re-export of capital). The focus on finance became even 
more problematic in the quarter of a century after Lenin wrote. 
The quantity of capital invested abroad never rose above the level 
of 1914 and then declined. 42 Yet the great capitalist powers re- 
mained intent on imperialist expansion during the interwar years, 
with Britain and France grabbing most of the Middle East and the 
former German colonies, Japan expanding into China, and 
German heavy industry looking to carve out a new empire in 

The phraseology of certain parts of Lenin's pamphlet has led to 
some interpretations of it that see financial interests, rather as 
Hobson and Kautsky did, as mainly responsible for imperialism. 
This was especially so when, basing himself on Hobson, Lenin in- 
sisted on the "parasitic" character of finance capital, writing of: 

the extraordinary growth of... a social stratum of rentiers, ie 
people who live by "clipping coupons", who take no part in any 
enterprise whatever, whose profession is idleness. 43 

This stress on the "parasitism" of finance capital has even led to 
some on the left embracing strategies based on anti-imperialist 
alliances with sections of industrial capital against finance capi- 
tal — precisely the Kautsky policy that Lenin attacked so bitterly. 

Bukharin's account of imperialism by and large avoids these 
faults. He uses the category of "finance capital" repeatedly. But 
he explicitly warns against seeing it as something distinct from 
industrial capital. "Finance capital... must not be confused with 
money capital, for finance capital is characterised by being si- 
multaneously banking and industrial capital". 44 It is inseparable, 
for Bukharin, from the trend towards domination of the whole 


Understanding the System: Marx and Beyond 

national economy by "state capitalist trusts" struggling globally 
against other "state capitalist trusts". 

Such a struggle did not have to concentrate on investing in for- 
eign countries. It could turn into something else: the effort to wrest 
from other countries already industrialised areas or sources of im- 
portant raw materials by force. As Bukharin put it, "The further it 
[imperialism] develops the more it will become a struggle for the 
capitalist centres as well". 45 

It was necessary, in other words, to turn vast amounts of value 
into means of destruction — not only in order to try to obtain more 
value but to hold onto that already possessed. This was the logic of 
the capitalist market applied to the relations between states. Each 
had to invest in preparations for war in order not to lose out as the 
other invested more, just as each capital had to invest in new 
means of production so as to hold its own in market competition. 
"Imperialist policies" were "nothing but the reproduction of the 
competitive struggle on a worldwide scale," with "state capitalist 
trusts", not individual firms, "the subjects of competition". The 
"explosions of war" were a result of "the contradiction between 
the productive forces of the world economy and the 'nationally' 
limited methods of appropriation of the bourgeoisie separated by 
states". 46 In other words, just as competition between capitals (and 
with it the free operation of the law of value) was reduced within 
states, it operated on an ever more ferocious scale between them. 

Rosa Luxemburg: imperialism and the collapse of capitalism 

Lenin and Bukharin were not the only Marxist opponents of im- 
perialism to attempt to prove that it was an essential stage of 
capitalism. Rosa Luxemburg also did so with a rather different 
theoretical analysis in her The Accumulation of Cap it al, published 
in 19 13. 47 It rested on what she believed to be a central contradic- 
tion within capitalism that had escaped Marx's notice. 

Marx had produced tables in Volume Two of Capital showing 
the interrelation between accumulation and consumption. Each 
round of production involved using the products of the previous 
round, either as material inputs (machinery, raw materials, etc) or 
as means of consumption for the workforce. This required that the 
material products in one round corresponded to what was needed 
for production to proceed at the next round. It was not merely a 

Beyond Marx: Monopoly, War and the State 


question of the right amounts of value passing from one round to 
the next, but also of the right sorts of use values — such and such 
quantities of raw materials, new machinery, factory building, etc, 
and such and such quantities of food, clothing, etc, for the work- 
force (plus luxury goods for the capitalists themselves). Rosa 
Luxemburg, in examining Marx's tables, came to the conclusion 
that discrepancies were bound to arise between the distribution of 
value from one round to another and the distribution of the use 
values needed to expand production. More consumer goods 
would be produced than could be bought with the wages paid out 
to workers or more investment goods than could be paid for out of 
profits. In other words, the system inevitably produced an excess 
of goods for which there was no market within it. Overproduction 
was not just a phase in the boom-slump cycle, but endemic. 
Conceived of as a closed system, in which all the outputs of one 
round of production had to be absorbed as inputs in later rounds, 
capitalism was doomed to tend towards a complete breakdown. 

In the early stages of capitalism this was not a problem. It was 
not a closed system. Precisely because it grew up within a pre- 
capitalist world it was surrounded by people who were not part 
of it — artisans, the remnants of feudal ruling classes and vast 
numbers of subsistence peasants. They could absorb the surplus 
goods, providing raw materials in return. But the more capital- 
ism came to dominate in a particular country, the more it would 
be faced with this contradiction — unless it expanded outwards 
to seize control of other, pre-capitalist, societies. Colonisation 
was in this way essential for the continued functioning of the 
system. Without it capitalism would collapse. 

Luxemburg did not simply produce this argument in an analyt- 
ical form. She supplemented it with chapter after chapter showing 
in horrifying detail how the historical development of capitalism 
in Europe and North America had been accompanied by the sub- 
jugation and exploitation of the rest of the world. Her conclusion, 
like Lenin and Bukharin's, was that socialist revolution was the 
only alternative to imperialism and war. 

Her analysis was, however, subject to trenchant and devastat- 
ing critiques, most notably by the Austrian reformist Marxist Otto 
Bauer and by Bukharin. Bauer produced his own versions of the 
reproduction tables, claiming that there was no problem getting 
the inputs and outputs to balance properly over several rounds of 
production. Bukharin concentrated on refuting points Luxemburg 


Understanding the System: Marx and Beyond 

made in her "anti-critique" reply to Bauer. She had argued that 
there had to be something outside capitalism to provide an incen- 
tive to the capitalists to keep investing. It was not good enough for 
ever increasing amounts of investment to absorb the growing 
output of society, since, she argued, this would provide no gain to 
the capitalists to justify such investment: 

Production to an ever greater extent for production's sake is, 
from the capitalist point of view, absurd because in this way it is 
impossible for the entire capitalist class to realise a profit and 
therefore to accumulate. 48 

Bukharin's reply, in essence, amounted to pointing out that it was 
precisely such apparently absurd accumulation for the sake of ac- 
cumulation that characterised capitalism for Marx. 49 Capitalism 
did not need a goal outside itself. It could be added that it is pre- 
cisely this which epitomises the extreme alienation of human 
activity in the system: it is driven forward not by the satisfaction of 
human need, not even by the human need of the capitalist, but by 
its own dynamic. 

Bukharin did not deny that discrepancies arise in the course of 
capitalist development between production and consumption. He 
insisted in his comments on Luxemburg that they are inevitable — 
but it is precisely the capitalist crisis that overcomes them. 
Over-accumulation and overproduction occur, but not all the time. 
They arise in the course of the crisis and are liquidated by its fur- 
ther development. And Bukharin quoted Marx: "There is no 
permanent crisis". 50 For him imperialism was not to be explained 
by the problems of overproduction, but by the way in which it aids 
the capitalist pursuit of higher profits. 

Bukharin's argument against Luxemburg cannot be faulted. But 
he and Lenin do leave something unexplained: why the export of 
capital during the high tide of imperialist expansion was able to 
lead capitalism out of the Great Depression. For all its problems, 
Rosa Luxemburg's theory did attempt to find a link between im- 
perialism and the temporary mitigation of crisis, which Lenin and 
Bukharin failed to. 

Writing in the 1920s, Henryk Grossman, critical both of Rosa 
Luxemburg and her detractors, 51 did point to a way of making 
the link. The flow of capital from existing centres of accumula- 
tion to new ones overseas could ease the pressure leading to a 

Beyond Marx: Monopoly, War and the State 


rising organic composition of capital and a falling rate of profit, 
even if such a solution would "only have a short time effect". 52 

This insight can make sense of the actual pattern of economic 
development during the high tide of imperialism at the end of the 
19th century. Had the half of British investment that went overseas 
been invested domestically it would have raised the ratio of invest- 
ment to labour (the organic composition of capital) and so 
lowered the rate of profit. As it was, estimates suggest that the cap- 
ital-output ratio actually fell from 2.16 in 1875-83 (the years of 
the first "Great Depression") to 1.82 in 1891-1901, 53 and that the 
early 1890s were a period of rising profit rates (following a fall 
from the 1860s to the 1880s). 54 And in these years what happened 
in Britain still had a major impact on the rest of the system. 

This points to a wider and very important insight into the dy- 
namic of capitalism in the 20th and 21st centuries to which we 
will return in later chapters. For the moment it is sufficient to 
recognise that imperialism arose out of the competitive drive of 
capitals to expand beyond national frontiers — and led, as a tem- 
porary side-effect, to a lessening of the pressures otherwise 
driving up the organic composition of capital and so lowering the 
rate of profit. But it could only be a temporary effect because 
eventually investments made in the new centres of accumulation 
would produce new surplus value seeking investment and exert- 
ing a downward pressure on profit rates. As that happened the 
old contradictions in the system would return with a vengeance, 
opening up a new period of economic instability which would 
lead to intensified competition, not only of an economic but also 
of a military sort. This is effectively what happened in the first 
decades of the 20th century, with an international tendency to- 
wards falling profit rates and increased tensions between states. 
Amended in this way, the insistence by Lenin, Bukharin and 
Luxemburg on the connection between capitalism and war could 
be made theoretically watertight. 

A problem Marx left behind 

The classic theory of imperialism has one important implication. 
It raises the question of the relation between states and the capi- 
tals within them. Marx left the question unresolved. He took up 
some of its aspects in his non-economic writings, 55 but did not get 


Understanding the System: Marx and Beyond 

as far as integrating them into his analysis of the capitalist system 
as a whole. But the question is not one that any serious analysis of 
capitalism in the century after his death can avoid. A quick glance 
at the growth of state expenditure shows why (see the graph below 
for the United States). From its share of national output being 
more or less static through the 19th century, except at times of all- 
out war, it started growing in the second third of the 20th century 
and has never stopped doing so. 

US Government Spending as Proportion of Gross Domestic Product 56 


1800 1840 1880 1920 1960 

The most common view of the state, among Marxists and non- 
Marxists alike, has been to see it as something external to the 
capitalist economic system. This approach has long been ac- 
cepted by the mainstream "Realist" school in the academic 
discipline of international relations. It sees states as self-con- 
tained entities clashing internationally according to a logic which 
has nothing to do with the economic form of organisation exist- 
ing within them. 57 A somewhat similar approach is to be found 
in some Marxist writings. 

Capitalism, in this view, consists of the pursuit of profits by 
firms (or, more accurately speaking, the self-expansion of capitals) 
without regard to where they are based geographically. The state, 
by contrast, is a geographically based political entity, whose 
boundaries cut across the operations of individual capitals. The 
state may be a structure that developed historically to provide the 
political prerequisites for capitalist production — to protect capi- 
talist property, to police the dealings of different members of the 
ruling class with each other, to provide certain services which are 
essential for the reproduction of the system, and to carry through 

Beyond Marx: Monopoly, War and the State 


such reforms as are necessary to make other sections of society 
accept capitalist rule — but it is not to be identified with the capitals 
that operate within it. 

Those who view the state as simply external to capitalism tend 
to refer to the "state" in the singular — and often to "capital" in 
the singular as well. This way of putting it may make sense when 
providing an account of capitalism at the most abstract level, with 
the state providing a level playing field on which different capitals 
compete on equal terms. But the actually existing capitalist system 
is made up of many states 58 and many capitals. 59 

But even those who see states as existing in the plural, as does 
Ellen Wood, often conclude that they serve the interests of capital 
in general, not of particular capitalists based within them. "The es- 
sential role of the state in capitalism", she argues: 

is not to serve as an instrument of appropriation, or a form of 
"politically constituted property", but rather as a means of cre- 
ating and sustaining the conditions of accumulation at arms 
length, maintaining the social, legal and administrative order 
necessary for accumulation. 60 

As against these views, there are those whose analyses start from 
the classic theories of imperialism, with their language about the 
state "merging" with capital, of "state monopoly capitalism", or 
simply of "state capitalism", and their view of the clashes between 
states as an expression of international competition of the capitals 
operating within them. 

A bowdlerised version of this view became part of the ortho- 
doxy of Stalinised Marxism in the years from the 1930s to the 
1970s, known for short as "stamocap". A more serious attempt to 
describe the world system as composed of state capitals in the 
decades after the Second World War was made by Mike Kidron. 61 
In his account individual states and individual capitals became 
completely congruent with each other: every state acted at the 
behest of a set of nationally based capitals, and every significant 
capital was incorporated in a particular state. Any exceptions, for 
Kidron, were a hangover from the past, relics which would disap- 
pear with the further development of the system. 

A parallel attempt to see the world in terms of states represent- 
ing capitals was developed in the early 1970s in debates between 
German Marxists. 62 Claudia von Braunmuhl, for instance, wrote: 


Understanding the System: Marx and Beyond 

it is not the state in general that must be analysed but "the spe- 
cific political organisation of the world market in many 
states" ... the role of the state in question in its specific relation- 
ship with the world market and with other states must always 
be included in the analysis from the outset. 63 

Few people have followed through such attempts to develop such 
insights into a rigorous interpretation of the world system. But 
some of their presuppositions are taken for granted in everyday 
ways of talking and writing about the world. People habitually 
speak of "the economic interests" of this or that state, of how one 
is doing compared with another, of the "profits" of one or other 
country. So the recent very useful account of capitalism since the 
Second World War by Robert Brenner emphasises the interactions 
of "US capitalism", "Japanese capitalism" and "German capital- 
ism", with negotiation by states playing a central role. 64 There is 
the implication of a tight alignment of interest between a particu- 
lar national state and a particular sector of the international 
capitalist system. 

The view of national states as wholly congruent with "na- 
tional" capitals is a big oversimplification, especially in today's 
world, with multinational corporations operating in scores of 
countries, as we shall see later. But this does not mean that states 
simply stand at "arms length" from particular capitals, or that 
states do not act at the behest of particular nationally based group- 
ings of capital. They remain tied to them in complex ways. 

The genesis of the capitalist state 

A starting point for understanding this can be found in the relation- 
ship between the development of modern states and capitalism. This 
was not dealt with explicitly by Marx, and it was Engels who first 
did so in a manuscript written after Marx's death and not published 
until 1935. His studies led him to conclude that as merchants and 
tradespeople of the towns (the "burghers") grew in importance at 
the end of the Middle Ages they allied themselves with the monar- 
chy against the rest of the feudal ruling class: "Out of the confusions 
of the people that characterised the early Middle Ages, there gradu- 
ally developed the new nationalisms" — and the beginnings of 
national states very different to the earlier political structures. 65 

Beyond Marx: Monopoly, War and the State 


Lenin further theoretically elaborated similar insights as the revolu- 
tionary movement in Russia tried to come to terms with the demand 
for independent states arising among the Tsarist empire's minority 
nationalities on its borders in south eastern Europe and in the colo- 
nial possessions of the West European powers. 

He spelt out the deep connections between the struggle to es- 
tablish national states and the emergence of groups in the 
pre-capitalist world who wanted to base themselves on capitalist 
forms of economic organisation: 

Throughout the world, the period of the final victory of capital- 
ism over feudalism has been linked up with national movements. 
For the complete victory of commodity production, the bour- 
geoisie must capture the home market, and there must be 
politically united territories whose population speak a single lan- 
guage, with all obstacles to the development of that language 
and to its consolidation in literature eliminated... Therefore, the 
tendency of every national movement is towards the formation 
of national states, under which these requirements of modern 
capitalism are best satisfied... The national state is typical and 
normal for the capitalist period. 66 

Modern states have not developed, according to this conception, 
as external to the capitals (or at least, to most of the capitals) based 
within them. They have been shaped historically by the process by 
which capitalist methods of accumulating wealth began to take 
root, first in parts of Europe and then in the rest of the world. 
Those groups identifying with such methods needed to protect 
themselves against the various social forces associated with the 
pre-capitalist society in which they developed — and very soon 
against other capitalist groups located elsewhere. This meant seek- 
ing to shape political structures to defend their common interests, 
by force if necessary, in what could be a hostile world. Where old 
pre-capitalist state forms existed, they had to get control of them 
and reorganise them to fit their own interests (as in England or 
France) or break apart from them to form new states (as with the 
Dutch Republic, the United States and the ex-colonial countries of 
the second half of the 20th century). By the late 19th century it 
was not only existing capitalist interests which sought to build 
such states. So too did elements from old exploiting classes in 
places like Germany, Tsarist Russia and Japan who wanted to sur- 


Understanding the System: Marx and Beyond 

vive in a world increasingly dominated by capitalist powers on the 
one hand, and the middle class intelligentsia who came to play a 
leading role in many of the national movements in the colonial 
world on the other. 

This picture has been rejected by some Marxists on the grounds 
that states existed before the rise of capitalism. The "system of 
states" is then seen as something completely distinct from the 
system of capitalism, and there is a "logic of states" that differs 
from the "logic of capital". But the old states were not left as they 
were with the rise of capitalism. They were reshaped fundamen- 
tally, with a redrawing of old territorial boundaries and the 
establishment for the first time of centralised structures that 
reached down into the lives of every inhabitant (for the first time 
they were all "citizens"). 67 The fact that the new structures func- 
tioned through the deployment of force, not the production of 
commodities for sale, did not stop them being shaped by the 
changing relations of production and exploitation created by the 
rise of capitalism. And they were from the beginning — and remain 
today — structures that feed back into the organisation of produc- 
tion by capitals, influencing the tempo and direction of their 
accumulation. The logic of states was a product of the wider logic 
of capitalism, even if it frequently came into contradiction with 
other elements in the system. 68 

Capital exists in three forms — as productive capital, as com- 
modity (or merchants') capital and as money capital. 69 Every 
process of capital accumulation under fully developed capitalism 
involves repeated changes from one form to another: money capi- 
tal is used to buy means of production, raw materials and labour 
power; these are put together in the production process to turn out 
commodities; these commodities are then exchanged for money; 
this money is then used to buy more means of production, raw ma- 
terials and labour power, and so on. The forms of capital are 
continually interacting as one changes into the other. But there can 
also be a partial separation of these three different forms. The or- 
ganisation of direct production, the selling of commodities and the 
supply of finance can devolve upon different groups of capitalists. 

Money capital and commodity capital can be continually 
mobile, moving from place to place and across national bound- 
aries, unless obstructed by the state or other bodies exercising 
force. Things are rather different with productive capitals. 
Regarded simply as accumulations of value, they differ from each 

Beyond Marx: Monopoly, War and the State 


other only in their size. But each individual capital, like each indi- 
vidual commodity, has a twofold character. As well as being 
measurable in terms of exchange value, it is also a concrete use 
value — a concrete set of relations between people and things in the 
process of production. Each particular capital has its concrete 
ways of bringing together labour power, raw materials and means 
of production, of raising finance and getting credit, and of main- 
taining networks for distributing and selling its output. These all 
involve interaction with other people and with nature, interactions 
of a physical sort, which take place on a day to day basis in fixed 
geographical locations. 

No productive capital can function without, on the one hand, a 
guarantee of its control of its own means of production (a guaran- 
tee which, in the last resort, relies upon "armed bodies of men"), 
and, on the other, a labour force that is doubly "free" — free from 
coercion by non-capitalist exploiters on the one hand and free 
from any way of making a livelihood than by selling its labour 
power on the other. The productive capitalists in any particular lo- 
cality necessarily act together to try to shape its social and political 
conditions, that is to exercise influence over the state. As sociolo- 
gist Neil Brenner puts it: 

In its drive to accumulate surplus value, capital strives to... over- 
come all geographical barriers to its circulation process. Yet to 
pursue this continual dynamic... capital necessarily depends 
upon relatively fixed and immobile territorial infrastructures, 
such as urban regional agglomerations and territorial states... 
Capital's endemic drive ... is intrinsically premised upon the pro- 
duction, reproduction, and reconfiguration of relatively fixed 
and immobile configurations of territorial organisation, includ- 
ing urban regional agglomerations, transportation networks, 
communication systems, and state regulatory institutions. 70 

Most capitalist enterprises operate not simply on market calcula- 
tions, but also on the long-term relations they establish with other 
enterprises that sell to them and buy from them. Otherwise they 
would live in continual fear that any change in market conditions 
would cause their suppliers to sell elsewhere and those who trans- 
port and retail their goods suddenly to lose interest in them. They 
seek to "lock in" these other firms by a combination of financial 
incentives, business favours and personal contact. To this extent 


Understanding the System: Marx and Beyond 

production does not take place in individual firms, but in "indus- 
trial complexes", which have grown up over time. 71 

The market models of classical and neo-classical economics 
portray capitals as isolated atoms which engage in blind competi- 
tion with other capitals. In the real world capitalists have always 
tried to boost their competitive positions by establishing alliances 
with each other and with ambitious political figures — alliances ce- 
mented by money but also by intermarriage, old boy networks and 
mutual socialising. 72 

Even the fluidity of money capital does not diminish the im- 
portance of the particular national states for particular financial 
institutions. As Costas Lapavitsas has noted in his analysis of 
money under capitalism, "Trade credit depends on trust among 
individual capitalist enterprises that is subjective and private, 
since such trust draws on knowledge that enterprises have accu- 
mulated about each other in the course of their commercial 
relations". 73 And the networks that provide such knowledge have 
to a very high degree been organised on a national basis, with the 
state, through the central bank, playing a key role. "The institu- 
tions and markets of the credit system, regulated and managed by 
the central bank, place social power and trust at the service of 
capitalist accumulation". 74 

The relationship between states and capitals are relationships be- 
tween people, between those engaged in exploiting the mass of the 
population and those who control bodies of armed men. Personal 
contact with the leading personnel of the state is something every 
capitalist aims at — just as every capitalist seeks to cultivate ties of 
trust and mutual support with certain other capitalists. The "con- 
nections" Lenin referred to 75 are immensely important. 

Such interactions inevitably leave an imprint on the internal 
make up of each capital, so that any particular capital would find 
it very difficult to cope if it were suddenly to be torn apart from 
the other capitals and the state with which it has co-existed in the 
past. The national state and different nationally based capitals 
grow up together, like children in a single family. The development 
of one inevitably shapes the development of the others. 

The groups of capitals and the state with which they are associ- 
ated form a system in which each affects the others. The specific 
character of each capital is influenced by its interaction with the 
other capitals and the state. It reflects not only the general drive to 
expand value, to accumulate, but also the specific environment in 

Beyond Marx: Monopoly, War and the State 


which it has grown up. The state and the individual capitals are in- 
tertwined, with each feeding off the other. 

Neither the state nor the particular capitals can easily escape this 
structural interdependence. The particular capitals find it easier to 
operate within one state rather than another, because they may 
have to profoundly restructure both their internal organisation and 
their relations with other capitals if they move their operations. The 
state has to adjust to the needs of particular capitals because it de- 
pends on them for the resources — particularly the revenues from 
taxation — it needs to keep going: if it goes against their interests, 
they can move their liquid assets abroad. The pressures which dif- 
ferent states apply on each other are indispensable for the capitals 
based within each to ensure that their interests are taken into ac- 
count when they are operating globally. The existence of rival states 
is not something produced from outside capitalism nor is it op- 
tional for capitalists. It is integral to the system and to its dynamic. 
Failure to grasp this, as, say, Nigel Harris does, leaves a great hole 
in any attempt to understand capitalism over the last century. 

The "autonomy" of the state and the class nature of its 

The mutual dependence of states and capitals does not, however, 
mean that states can simply be reduced to the economic entities 
that operate within them. Those who do the actual running of the 
state take on functions which competition between firms prevents 
firms themselves undertaking. They have to mediate between rival 
capitals, providing judicial systems and overseeing, through cen- 
tral banks, the financial system and the national currency. As 
Claus Offe put it, "Since 'capital as a whole' exists only in the ideal 
sense... it requires special guidance and supervision by a fully dif- 
ferentiated political-administrative system". 76 

The state also has to provide mechanisms for integrating the 
mass of people into the system: on the one hand the coercive insti- 
tutions that beat people into submission (police, secret police, 
prisons); on the other hand the integrative mechanisms that divert 
grievance into channels compatible with the system (parliamen- 
tary structures, frameworks for collective bargaining, reformist, 
conservative or fascist parties). The proportions in which these 
two sets of mechanisms operate vary from situation to situation, 


Understanding the System: Marx and Beyond 

but everywhere they exist to complement each other. The coercive 
mechanisms persuade people to take the easier path of integration 
into the system; the integrative mechanisms provide the velvet 
glove which conceals the iron hand of state coercive power, so le- 
gitimising it. The Italian revolutionary Marxist Antonio Gramsci 
rightly used Machiavelli's metaphor of the "centaur", half animal, 
half human, to capture the way in which force and consent are 
combined in the state. 77 

The coercive and the integrative mechanisms depend on organ- 
isation and leadership from outside the sphere of capitalist 
exploitation and accumulation as such — from military and police 
specialists on the one hand, from political leaders able to mobilise 
some degree of social support on the other. An effective state re- 
quires the building of coalitions that obtain the support — or at 
least the compliance — of such elements while allowing them a cer- 
tain leeway to pursue their own interests. 78 It then, inevitably, 
reflects not just the interests of capital in general, but the conces- 
sions it makes to integrate other social groups and classes into its 
rule. It necessarily displays an important degree of autonomy. 

Marx commented in 1871 that "the complicated state machin- 
ery... with its ubiquitous and complicated military, bureaucratic, 
clerical and judiciary organs, encoils the living society like a boa 
constrictor..." The state bureaucracy arises to assure the domina- 
tion of the existing ruling class, but in the process becomes a 
"parasite" which is capable of "humbling under its sway even the 
interests of the ruling classes..." 79 

This autonomy reaches its highest points when governmental 
power lies with reformist, populist or fascist parties with a power- 
ful base among workers, peasants or the petty bourgeoisie. There 
are cases when those who exercise such autonomy are able to 
break with and even expropriate important capitalist interests 
within their territory. This was to be true on numerous occasions 
in the course of the 20th century — German Nazism, Argentine 
Peronism, Nasserism in Egypt, Ba'athism in Syria and Iraq, are all 
examples. There are also innumerable cases in which individual 
capitals behave in ways detrimental to the interests of "their" 
state — moving funds and investment abroad, doing deals with for- 
eign capitalists that undercut other local capitals, even selling 
weapons to states fighting their own. 

Yet there are limits to the extent to which a state can break free 
from its capitals, and capitals from their state. A state may override 

Beyond Marx: Monopoly, War and the State 


the interests of particular capitalists; it cannot forget that its own 
revenues and its own ability to defend itself against other states 
depend on the continuation of capital accumulation. Conversely, 
the individual capital can, with considerable difficulty, uproot itself 
from one national state terrain and plant itself in another; but it 
cannot operate for any length of time in a "Wild West" situation 
with no effective state to protect it both against those forces below 
which might disrupt its normal rhythms of exploitation and against 
other capitals and their states. 

A break between either a state with its capitals or by capitals 
with their state is a difficult and risky business. If a state turns on 
private capital, it can create a situation in which people begin to 
challenge not merely private capital but capital accumulation as 
such and, with it, the hierarchies of the state. If a private capital 
breaks with "its" state it risks being left to fend alone in a hostile 
and dangerous world. 

This mutual interdependence between states and capitals has 
implications for an issue which many analysts never even touch 
on — the class character of the state bureaucracy itself. The as- 
sumption is usually either that it is simply a passive creature of a 
private capitalist class or that it is a separate political formation 
with interests quite different to those of any form of capital. Class 
is seen as depending on individual ownership (or non-ownership) 
of property, and the conclusion drawn is that the state bureaucracy 
cannot be an exploiting class or part of an exploiting class. This is 
implicit in the view of, say, Ellen Wood and David Harvey, who see 
state run economic activities as lying "outside" the system of cap- 
italist production. 80 

Such an approach leaves a huge hole when it comes to 
analysing capitalism in the century and a quarter since Marx's 
death. The total income of society passing through the hands of 
the state has reached levels much greater than income going di- 
rectly to private capital as profits, interest and rent. Investment 
directly undertaken by the state is often more than half of total in- 
vestment, 81 and the state bureaucracy directly disposes of a very 
big portion of the fruits of exploitation. 

An analysis of class in such a situation cannot restrict itself to 
looking at things as they appear in the official "common sense" 
of a society as expressed in its juridical definitions of property. 
Classes, for Marx, depend not on such formal definitions, but 
on the real social relations of production in which people find 


Understanding the System: Marx and Beyond 

themselves. They are aggregates of people whose relationship to 
material production and exploitation forces them to act to- 
gether collectively against other such aggregates. In an 
unfinished final chapter to Volume Three of Capital Marx in- 
sists that classes cannot be identified simply by the "sources of 
revenues" since this would lead to an infinite division of classes, 
paralleling "the infinite fragmentation of interests and rank into 
which the division of social labour splits labourers as well as 
capitalists and landlords". 82 What makes such diverse groups 
come together into the great classes of modern society, he argues 
elsewhere, is the way in which the revenues of one set of groups 
arise out of the exploitation of those who make up other 
groups. As he put it in his notebooks for Capital, "Capital and 
wage labour only express two factors of the same relation". 83 
The capitalist is only a capitalist insofar as he embodies the self- 
expansion of value, insofar as he is the personification of 
accumulation; workers are workers only insofar as "the objec- 
tive conditions of labour" confront them as capital. 

Since the directing layer in the state bureaucracy is compelled to 
act as an agent of capital accumulation, whether it likes it or not, 
it comes to identify its own interests as national capitalist interests 
in opposition to both foreign capital and the working class. Just as 
the individual capitalist can choose to enter one line of business 
rather than another, but cannot avoid the compulsion to exploit 
and accumulate in whatever line he goes into, so the state bureau- 
cracy can move in one direction or another, but cannot ignore the 
needs of national capital accumulation without risking its own 
longer term future. Its "autonomy" consists in a limited degree of 
freedom as to how it enforces the needs of national capital accu- 
mulation, not in any choice as to whether to enforce these or not. 

The dependence of the state bureaucracy on capitalist exploita- 
tion is often concealed by the way in which it raises its 
revenues — by taxation of incomes and expenditure, by govern- 
ment borrowing or by "printing money". All of these activities 
seem, on the surface, to be quite different from capitalist exploita- 
tion at the point of production. The state therefore seems like an 
independent entity which can raise the resources it needs by levy- 
ing funds from any class in society. But this semblance of 
independence disappears when the state's activities are seen in a 
wider context. State revenues are raised by taxing individuals. But 
individuals will attempt to recoup their loss of purchasing power 

Beyond Marx: Monopoly, War and the State 


by struggles at the point of production — the capitalists by trying 
to enforce a higher rate of exploitation, the workers by attempting 
to get wage increases. The balance of class forces determines the 
leeway which exists for the state to increase its revenues. These are 
part of the total social surplus value — part of the total amount by 
which the value of workers' output exceeds the cost of reproduc- 
ing their labour power. 

In this sense, state revenues are comparable to the other rev- 
enues that accrue to different sections of capital — to the rents 
accruing to landowners, the interest going to money capital, the 
returns from trade going to commodity capital and the profits of 
productive capital. Just as there is continual conflict between the 
different sections of capital over the sizes of these different rev- 
enues, so there is continual conflict between the state bureaucracy 
and the rest of the capitalist class over the size of its cut from the 
total surplus value. The state bureaucracy will, on occasions, use 
its own special position, with its monopoly of armed force, to 
make gains for itself at the expense of others. In response to this, 
the other sections of capital will use their own special position — 
industrial capital its ability to postpone investment, money capital 
its ability to move overseas — to fight back. 

Yet in all this, the different sections of capital cannot escape 
their mutual interdependence more than temporarily. It eventually 
asserts itself in the most dramatic fashion, through crises — the 
sudden collapse of the system of credit, the sudden inability to sell 
commodities, sudden balance of payment crises or even the threat 
of state bankruptcy. Those who direct the bureaucracies of the 
state may not own individual chunks of capital, but they are 
forced to behave as agents of capital accumulation, to become, ac- 
cording to Marx's definition, part of the capitalist class. 

Marx points out in Capital that with the advance of capitalist 
production there takes place a division of function within the cap- 
italist class. The owners of capital tend to play a less direct part in 
the actual organisation of production and exploitation, leaving 
this to highly paid managers. But, insofar as these managers con- 
tinue to be agents of capital accumulation, they remain 
capitalists. Hilferding developed the argument further, pointing to 
the divisions within a single capitalist class between the mass of 
rentier capitalists, who rely on a more or less fixed rate of return 
on their shares, and "promoter" capitalists who gain extra sur- 
plus value by gathering together the capital needed by the giant 


Understanding the System: Marx and Beyond 

corporations. 84 We can add a further distinction, between those 
who manage the accumulation of individual capitals and those 
who, through the state, seek to promote the development of the 
sibling capitals operating within an individual state — what may 
be called "political capitalists". 

State capitalism and state capitalists 

One of the most significant developments of the 20th century 
was the emergence of big state-owned economic sectors. The 
state came to plan the whole of internal production in Germany 
in the latter part of the First World War, in the US and Britain as 
well as Germany throughout most of the Second World War — 
and, of course, in the USSR from Stalin to Gorbachev and in 
China under Mao. 

Just as many analysts accept the "common sense" view that the 
state is something outside of capitalism, so they also refuse to 
accept that state-run industries and economies can be capitalist. 85 
The classical Marxists, however, saw things rather differently. 
Marx in Volume Two of Capital was already "including" among 
"the sum of individual capitals", "...the state capital, so far as 
governments employ productive wage labour in mines, railways 
etc, perform the function of industrial capitalists". 86 Engels spelt 
this out much more fully in reacting to Bismarck's nationalisation 
of the German railway system: 

The modern state, no matter what its form, is essentially a capi- 
talist machine, the state of the capitalists, the ideal personification 
of the total national capital. The more it proceeds to the taking 
over of productive forces, the more it actually becomes the na- 
tional capitalist, the more citizens it exploits. The workers remain 
wage workers — proletarians. The capitalist relation is not done 
away with. It is rather brought to a head. 87 

Kautsky could argue in the 1890s that the original economic liber- 
alism (from which present day neoliberalism gets its name) of the 
"Manchester school" "no longer influences the capitalist class" 
because "economic and political development urged the necessity 
of the extension of the functions of the state", forcing it "to take 
into its own hands more and more functions or industries". 88 

Beyond Marx: Monopoly, War and the State 


Trotsky could write a quarter of a century later, in The Manifesto 
of the Communist International to the Workers of the World: 

The statisation of economic life, against which the capitalist lib- 
eralism used to protest so much, has become an accomplished 
fact... It is impossible to return not only to free competition but 
even to the domination of trusts, syndicates and other economic 
octopuses. Today the one and only issue is: Who shall hereforth 
be the bearer of statised production — the imperialist state or the 
victorious proletariat. 89 

What all of them recognised was that state rather than private 
ownership of the means of production did not alter the fundamen- 
tal relations of production or the dynamic of capitalist 
accumulation. For the state, the purpose of nationalised industry 
was to enable domestic accumulation to match that undertaken by 
foreign rivals so as to be able to survive successfully in economic 
and/or military competition. To this end, the labour employed re- 
mained wage labour, and the attempt was made to hold its 
remuneration down to the minimal level required to sustain and 
reproduce labour power. The state might plan production within 
the enterprises it owned, but its planning was subordinated to ex- 
ternal competition, just as the planning within any privately 
owned firm was. The self-expansion of capital remained the goal, 
and this meant that the law of value operated and made itself felt 
on the internal operations of the enterprises. 

In behaving like this, state appointees behave as much like 
capitalists — as living embodiments of capital accumulation at the 
expense of workers — as do private entrepreneurs or shareholders. 

It was a failure to recognise this that led Hilferding in the 1920s 
to come to the conclusion that "organised" capitalism was over- 
coming the contradictions analysed by Marx. By the late 1930s 
state planning in Nazi Germany led him to conclude that what ex- 
isted was no longer capitalism at all, but a new form of class 
society, in which "organisation" had superseded "capitalism", and 
where the driving force had ceased to be profit making to feed the 
competitive accumulation of rival capitals. 

What Hilferding failed to grasp — as do all those today who 
still identify capitalism with the private ownership of firms com- 
peting in free markets — is that the system remained based on 
competitive accumulation between different capitals, even if these 


Understanding the System: Marx and Beyond 

were now military state capitalisms. It was driven forward by the 
same dynamic and subject to the same contradictions analysed by 
Marx. This was true during the period of total war, in which the 
rival states did not trade directly with each other and naval block- 
ades greatly limited their competition in foreign markets. Every 
success in accumulating military hardware by a state forced ef- 
forts to accumulate similar levels of military hardware in its 
rivals. Just as the efforts of rival car producers to outsell each 
other bring the concrete forms of labour in different car plants 
into an unplanned inter-relationship with each other, transform- 
ing them into different amounts of a homogenous abstract labour, 
so too the efforts of rival tank-producing states to outshoot one 
another have the same result. 

Marx described how under the market capitalism of his time: 

the labour of the individual asserts itself as a part of the labour 
of society only by the relations which the act of exchange estab- 
lishes directly between the products, and indirectly through 
them, between the producers. 90 

In the world system as it developed after Marx's death, military 
competition came to play the same role in bringing individual acts 
of labour performed in different, apparently closed, state entities, 
into a relationship with each other. 

Acquisition of the means of destruction on the necessary scale to 
assure success in war depended upon the same drive to accumulate 
means of production as did the struggle for markets — and with that 
went the holding down of wages to the cost of reproduction of 
labour power, the forcing up of productivity to the level prevailing 
on a world scale, and the drive to use the surplus for accumulation. 

As Tony Cliff pointed out more than 60 years ago, the only dif- 
ference, in this respect, between military and economic competition 
was the form the accumulation took — whether it was terms of an 
accumulation of use values that could be used to produce new 
goods or of use values that could be used to wage war. In either case 
the importance of these use values to those controlling them was 
determined by comparison with use values elsewhere in the system, 
a comparison which transmuted them into exchange values. 

This also meant the rate of profit continued to play a central 
role. It no longer determined the distribution of investment be- 
tween different sectors of the internal economy. The requirements 

Beyond Marx: Monopoly, War and the State 


of the military did this. But it operated as a constraint on the 
economy as a whole. If the ratio of total national surplus value to 
total investment in the military-industrial machine fell, this 
weakened the ability of the national state capitalism to sustain 
itself in warfare with its rivals. The decline in the rate of profit 
could not lead to economic slump, since the war machine would 
go on growing as long as there was any remaining mass of sur- 
plus value to be used up, however small. But it could contribute 
to military defeat. 

The same capitalist logic could be seen as operating in the states 
where new bureaucracies emerged to take control of the means of 
production (the USSR from the late 1920s onwards, 91 Eastern 
Europe and China after World War Two, various former colonial 
states in the late 1950s and 1960s). Although they called them- 
selves "socialist" their economic dynamic was dependent on their 
inter-relations with the wider capitalist world. If they traded with 
the capitalist countries beyond their borders, they were drawn into 
the logic of commodity production — and the requirement to 
remain competitive in markets by undertaking accumulation in an 
essentially capitalist way. But even if they tried to adopt an 
autarchic policy of cutting themselves off economically, they could 
not avoid having to defend themselves against predatory foreign 
imperialisms. In either case, they were subject to the logic of capi- 
talism as a world system in the 20th century in the way Bukharin 
had described in the early 1920s. And those who ruled these soci- 
eties were as much "personifications" of accumulation as were the 
private capitalists of Marx's time, driven into historic opposition 
to the wage labourers who toiled on the means of production. 
They were, in other words, members of a capitalist class, even if it 
was a class which collectively rather than individually carried 
through exploitation and accumulation. 

The state seemed, on the face of it, a great island of planning — 
at one time even half a continent of planning — within a world of 
market relations. But so long as states competed to expand the 
forces of production within them more rapidly than each other, the 
planning was, like the islands of planning within the individual 
capitalist enterprise of Marx's time, simply planning to keep 
labour productivity abreast with the labour productivity prevail- 
ing on a world scale. The law of value imposed itself through such 
competition on all the units in the world system. Those running 
whole states, particular state sectors or individual enterprises were 


Understanding the System: Marx and Beyond 

alike subject to pressure to reduce the price paid for every exertion 
of labour power to its value within the system as whole. 

The individual capitalist managers and individual state man- 
agers could rely for a time on the sheer size of the resources at their 
disposal to try to ignore these pressures. But they could not do so 
indefinitely. At some point they had to face hard choices if they 
were not to risk collapse: they could try to impose the law of value 
on those who laboured for them through what could be a painful 
and hazardous process of internal restructuring; or they could take 
desperate gambles in order to try to shift the global balance of 
forces in their favour. For the civilian corporation this might mean 
pouring resources into one last, possibly fraudulent, marketing 
ploy; for those running the state, to try to use its military force to 
compensate for its economic weakness. Hence the way in which 
the real history of capitalism in the 20th century was very different 
to the picture of peaceful and honest competition presented in eco- 
nomic textbooks — and accepted by some Marxists who have not 
understood the need to look at the real social relations which lie 
beneath surface appearances. 

Beyond Marx: Monopoly, War and the State 



State Spending 
and the System 

An important distinction 

If the enormous growth of the economic importance of the state 
was one feature which distinguished 20th century capitalism from 
the capitalism of Marx's time, another was the growth of all sorts 
of expenditures that were not directly productive. 

Marx had taken over from Adam Smith a distinction between 
"productive" and "unproductive" labour. Smith had been writing 
at a time when the capitalist mode of production was still in its in- 
fancy and he sought to work out what was needed for it to 
overcome obstacles to its further advance. He therefore distin- 
guished between the uses of hired labour that enabled the capitalist 
to make profits so as to further advance production and those 
which simply absorbed existing resources. Employing someone to 
make things to sell was productive; employing someone to tend to 
one's individual desires was not. Or, as it was sometimes put, em- 
ploying someone in a factory created wealth; employing someone 
as a personal servant simply used wealth up. But it was not only 
servants who Smith regarded as unproductive and wasteful in this 
sense: he had the same attitude to the hoards of placemen and 
women who lived off the revenues of a state which had not been re- 
formed fully to suit the needs of capitalist production. 1 

Marx took up this distinction as he prepared various drafts for 
Capital and developed his own understanding of it. He, like 
Smith, was interested in what made capitalism function — even if 
out of opposition to, not support for, the system. And so his con- 
cern was with what was "productive" in capitalist terms. 2 It was, 
he argued, that which was productive of surplus value. Labour 
which produced surplus value enabled capitalists to accumulate; 


labour which did not produce surplus value was of no use in this 
respect — it was "unproductive". 

In all this, he was careful to make it clear that the "productive- 
ness" of labour did not depend on the physical form or how socially 
useful the product was. What mattered was its ability to create sur- 
plus value — nothing else. "This distinction between productive and 
unproductive labour", he wrote in one of his notebooks, "has noth- 
ing to do with either the particular speciality of the labour or with 
the particular use value in which... [it]... is incorporated". 3 

Marx's distinction was not between material production and 
what today are categorised as "services". Some "services" have a 
use value that is bought and sold as a commodity on the market — 
or make a useful addition to some other commodity. These have 
an exchange value which is determined by the socially necessary 
labour time needed to produce them and so can provide capital- 
ists with new surplus value. They are therefore productive. Acting 
in a film, for instance, is productive insofar as it creates a use 
value (adding to people's enjoyment and so improving their living 
standard) that is sold profitably as a commodity by the capitalist 
who employs the actor. Similarly, moving things from where they 
are made to where they can be consumed, as is done by some 
transport workers, is productive, since it is in effect part of the 
process of completing their production. By contrast, actors who 
appear on television to urge people to buy a particular good are 
not productive, since their labour does not create new use or ex- 
change values. It merely aids in the selling of goods that have 
already been produced. 

Guglielmo Carchedi has rightly argued: 

The category "services" only confuses matters and should be 
dropped. "A service is nothing more than the useful effect of a 
use value, be it of a commodity, or be it of labour" [according to 
Marx]. 4 Therefore, "services" encompass productive labour 
(hotels, entertainment) and unproductive labour (advertising, 
market research)... 5 

In his first discussions on the issue in the early 1860s Marx as- 
sumed, like Smith, that unproductive labour is concerned with 
services provided by individuals for the upper classes. 6 These in- 
cluded providing "entertainments", dealing with "physical 
infirmities" (doctors) and "spiritual weakness" (parsons), and 


Understanding the System: Marx and Beyond 

resolving "the conflict between private interests and national in- 
terests" (eg statesmen, lawyers, police and soldiers). The last sort 
were regarded "by the industrial capitalists themselves" as inci- 
dental expenses of production to be kept down to the most 
indispensable minimum and provided as cheaply as possible. 7 

Marx recognised that sometimes personal services for the ruling 
class were provided not by individuals working on their own ac- 
count, but by capitalists employing paid labour to provide them to 
others. In these cases, he argued, the labour was productive be- 
cause it created surplus value. The capitalists who employed it, 
after all, sold the produce of the labour at more than they paid for 
the labour power and pocketed a profit as a result. So a teacher 
employed personally in someone's home to teach their children 
was providing a service from which no profit was made and was 
unproductive; by contrast, a teacher employed by a company 
which made a profit by running a school was productive. One did 
not in any way help capitalists to accumulate value; the other did. 
The distinction was between labour that was integral to capitalist 
production and accumulation, and that which was not. 

But in Capital Marx also found himself having to revisit the dis- 
tinction between productive and unproductive labour in a 
different context — a context which was integral to, not external 
to, capitalist production in its totality. For as capitalism developed, 
it became increasingly dependent on many forms of labour that 
produced nothing. 

There was the labour involved in maintaining discipline inside 
the capitalist enterprise — the "work" of managers, supervisors, 
foremen. There was the commercial labour involved in the ex- 
change of already produced commodities as they went through 
the various chains of buying and selling before reaching the final 
consumer. There was the financial labour involved in reckoning 
up profit and loss, advancing credit, and dividing up surplus value 
between the various sections of the capitalist class. Marx recog- 
nised that these sorts of labour would grow in quantity as 
capitalism expanded: 

It is clear that as the scale of production is extended, commer- 
cial operations required constantly for the recirculation of 
industrial capital... multiply accordingly... The more developed 
the scale of production, the greater... the commercial operations 
of industrial capital. 8 

State Spending and the System 


Such labour could not be regarded as productive if the capitalist 
employed it in these ways, any more than the labour of the servant 
could be. Maintaining discipline, selling goods or getting the ac- 
counts done were necessary functions that had to be paid for by 
deductions from surplus value, not creative labour that added to 
surplus value. They did not produce something new, but were 
merely concerned with controlling the production of value by 
others, with transforming it from one form (commodities) into an- 
other (money), or with dividing it up between people. The activities 
of a supervisor, a bank clerk or a shop assistant could no more 
create value (and therefore surplus value) than could the valet. 

But what happened if the productive capitalist used other capi- 
talists to carry out some of these functions on his behalf? The 
labour employed by these other capitalists should be counted as 
productive according to Marx's established definition since it en- 
abled them to make a profit. But seeing things like this presented a 
problem. The profit did not arise from increasing the total amount 
of output any more than it did when productive capitalists directly 
employed people to perform the tasks. It simply amounted to the 
second capitalist getting a slice of the surplus value originally in 
the hands of the first capitalist. Marx concluded that from the 
point of view of capitalist production such labour was unproduc- 
tive, even though this seemed to be based on a different definition 
of productive labour to that he used elsewhere. For this reason 
Jacques Bidet, for instance, has argued that Marx was inconsis- 
tent. 9 Yet it made sense in terms of the thing both Adam Smith and 
Karl Marx were interested in — the distinction between what ad- 
vanced capitalist development and what retarded it. 

So long as capitalists were operating in an economic environment 
in which capitalist production was not yet dominant, those who em- 
ployed workers to provide personal services were providing them 
mainly to those whose wealth came from outside the capitalist 
system. The payments received, for instance, by the owners of a 
school constituted a transfer of resources into the capitalist sector 
from the pockets of pre-capitalist exploiters — resources that could 
then be used for productive accumulation. By contrast, the mer- 
chants or shopkeepers who handled the goods of the productive 
capitalists got their profit from the already created surplus value of 
the productive capitalist. They were not adding to total surplus 
value and with it the further accumulation of capital. 

As Marx put it at one point: 


Understanding the System: Marx and Beyond 

To industrial capital the costs of circulation appear as unpro- 
ductive expenses, and so they are. To the merchant they appear 
as a source of profit, proportional, given the general rate of 
profit, to their size. The outlay to be made on these circulation 
costs is therefore productive investment for mercantile capital... 
And the commercial labour which it buys is likewise immedi- 
ately productive for it. 10 

The competition between commercial capitalists with each other 
meant that each was subject to the same pressures as the capitalists 
involved in production to keep wages down to the value of labour 
power. For this reason their workers were exploited in the same 
way as workers for capital involved in production. The more a 
commercial capitalist held down the wages and increased the 
workload of his employees, the greater was the share he could 
keep for himself of the payment he got from the productive capi- 
talists for providing services to them. If it took eight hours of 
socially necessary labour time to perform, say, a certain sales task, 
but only four hours to cover a sales worker's wage, then the shop- 
keeping capitalist could pocket four hours worth of the surplus 
value supplied from elsewhere in the system. 

But this did not mean that commercial labour could be equated 
with productive labour when it came to understanding the dy- 
namics of the system as a whole. One created resources that could 
be used for further accumulation, and the other did not. That is 
why Marx is insistent: 

Costs which enhance the price of a commodity without adding 
to its use value, which are therefore to be classed as unproduc- 
tive expenses so far as society is concerned, may be a source of 
enrichment to the individual capitalist. On the other hand, as 
this addition to the price of the commodity merely distributes 
the costs of circulation equally, they do not cease to be unpro- 
ductive in character. For instance, insurance companies divide 
the losses of individual capitalists among the capitalist class. But 
this does not stop these equalised losses from being losses so far 
as the aggregate social capital is concerned. 11 

The distinction between productive and unproductive labour is 
often seen as a merely scholastic question. But once seen in terms 
of what contributes to accumulation and what does not, it has 

State Spending and the System 


enormous implications — including some that Marx himself 
never developed. What is "productive of surplus value" for the 
individual capitalist (the definition of productive labour Marx 
used in his notebooks) is not necessarily what is productive in 
terms of adding to the surplus value available to capital in gen- 
eral for accumulation. And it is this that is central for the 
dynamic of the system. 

The scale of unproductive labour 

The level of unproductive expenditures involved in sales and finance 
grew throughout the 20th century. Anwar Shaikh and Ertugrul 
Ahmet Tonak calculate that the number of workers employed in 
trade in the US grew from 10,690,000 in 1948 to 24,375,000 in 
1989, and of those in finance and insurance from 1,251,000 to 
7,123,000. Meanwhile, the number of productive workers only 
grew from 32,994,000 to 41,148,000. 12 Fred Moseley estimates the 
numbers in commerce as growing from 8.9 to 21 million between 
1950 and 1980, and the number in finance from 1.9 to 5.2 million, 
while the productive workforce only grew from 28 to 40.3 million. 13 
The figures do not include the large number of managerial em- 
ployees who Marx regarded as non-productive because they are 
involved in policing those who actually produce value. Simon 
Mohun has calculated that the growth in their numbers and remu- 
neration caused the share of "unproductive" wages and salaries in 
the "material value added" in the US to rise from 35 percent in 
1964 to over 50 percent in 2000. 14 These figures also understate 
the total growth of unproductive labour because they do not in- 
clude employees involved in non-productive state functions like 
the military and the legal system. 

Unproductive expenditures and waste production 

There is another sort of labour that also has to be taken into con- 
sideration when examining 20th and 21st century capitalism. This 
is the labour that goes into producing commodities that are sold 
like other commodities but which do not then re-enter later rounds 
of production, whether as means of production or as wage goods. 
The labour producing luxury goods for the capitalist class falls 


Understanding the System: Marx and Beyond 

into this category. So too does labour that goes into military 
weaponry. Although such labour has usually been regarded as 
"productive" by Marxists, it shares with non-productive labour 
the fact that it does not add to capitalist accumulation. For these 
reasons it was argued by Mike Kidron in the early 1970s that it 
should also be regarded as non-productive: 

The ageing of capitalism., .opened a gulf between the two criteria 
of productiveness that he [Marx — CH] used interchangeably — 
employment by capital and augmenting capital... Now that 
capital is king... the two criteria are no longer congruous. 
Millions of workers are employed directly by capital to produce 
goods and services which it cannot use for further expansion 
under any conceivable circumstances. They are productive by one 
criterion and unproductive by the other... Given the need to 
choose, productive labour today must be defined as labour whose 
final output is or can be an input into further production. Only 
such labour can work for capital's self-expansion... To spell it 
out, in late capitalism only part of the surplus can be used for the 
expansion of capital. The rest is waste product. 15 

More recently Alan Freeman has also suggested that the notion of 
unproductive labour has to be extended to involve the use of 
labour to produce things that are then used in an unproductive 
manner. "The workers who decked the European Bank for 
Reconstruction and Development in marble are just as unproduc- 
tive as the clerks who now walk across it". 16 Guglielmo Carchedi, 
by contrast, argues there is labour that is productive if it has cre- 
ated new value, even if this does not then contribute anything to 
the next round of accumulation. 17 Regardless of how it is cate- 
gorised, the proportion of labour that is waste from the point of 
view of capital accumulation has become enormous. Kidron cal- 
culated that "three fifths of the work actually undertaken in the US 
in the 1970s was wasted from capital's own point of view". 18 

The state sector and non-productive labour 

Expenditures by individual capitals that are neither going to capi- 
tal investment nor to the wages of productive workers can be 
broken down into different categories: 

State Spending and the System 


(a) Those concerned with the disciplining of the workforce and 
ensuring it works flat out — expenditures on internal security, 
supervisory labour and time and motion measurement, 
checking on work speeds. 

(b) Those concerned with keeping the allegiance of the work- 
force, eg expenditures on internal public relations, works 
bulletins, management-run works committees, subsidies to 
works sports teams. 

(c) Those devoted to financial transactions, obtaining credit, 
bank charges, etc. 

(d) Those devoted to sales, advertising, etc. 

(e) Those concerned with keeping the workforce fit and able to 
work — company medical facilities, factory canteens, etc, in 
some cases the provision of housing for the workforce. 

(f) Those concerned with training the workforce — what main- 
stream economists often call "human capital". 

(g) Expenditures on research and development. 

Expenditures (a) and (b) are unambiguously unproductive. They 
create nothing and are only concerned with getting the maximum 
of already created value from the workers. Expenditures (c) and 
(d) are unproductive from the point of view of capital in general. 
They do not in any way add to the capacity of the system as whole 
to accumulate. But the individual firm can regard them as produc- 
tive in the same way as Marx wrote that the individual merchant 
capitalist did — they serve to get control of surplus value which 
would otherwise go to rival firms. So advertising expenditure, for 
example, may be seen by the firm, like expenditure on new equip- 
ment, as a way of expanding its position in the market, of 
forestalling attempts to enter the market by other capitalists, and 
so on. Similar expenditure on patents and patent protection may 
be seen as a way of getting a stranglehold on the market (I will 
return to the other types of expenditures (e) to (g) below). 

The growth of state expenditures in the course of the last cen- 
tury has involved states taking over partial responsibility for many 
of these outlays from the hands of the private capitals based in 
their national territory. So state expenditures can be broken down 
into categories playing the same or analogous functions to the ex- 
penditures of firms. 

There are those expenditures which are clearly unproductive 
in terms of accumulation throughout the system as a whole. 


Understanding the System: Marx and Beyond 

Among these are those concerned with protecting property, 
maintaining social discipline and ensuring the smooth reproduc- 
tion of class relations; maintaining state-run or financed forms 
of maintaining popular allegiance to the system, such as state 
produced propaganda and subsidies to religious institutions; the 
perpetuation of the ruling ideology through sections of the edu- 
cational system; maintaining the financial infrastructure of the 
system through the printing of national currencies and running 
central banks. 

Alongside these there are expenditures beneficial to nationally 
based capitals in competition with foreign capitals, but which, like 
the individual capitalists' expenditure on marketing or advertising, 
do not add to accumulation as a whole. This includes military ex- 
penditure, spending on export promotion schemes, negotiations 
with other governments over international trade and investment 
regulations, etc. 

It was these unproductive expenditures that Marx referred to 
when he wrote: 

Political economy in its classical period, like the bourgeoisie 
itself in its parvenu phase, adopted a severely critical attitude to 
the machinery of the state etc. At a later stage it realised and 
learnt from experience that the necessity for classes which were 
totally unproductive arose from its own organisation. 19 

Such growth in unproductive expenditures came to have a big 
impact on the dynamic of the system after Marx's death. 

Waste output and the system's dynamic 

Marx hinted at one important point about non-productive labour 
in his first attempt at a draft for Capital, the Grundrisse. He in- 
cludes among the "moments" that can delay the rise in the organic 
composition of capital and the fall in the rate of profit: 

the transformation of a great part of capital into fixed capital 
which does not serve as agency of direct production; unproduc- 
tive waste of a great portion of capital etc (productively 
employed capital is always replaced doubly, in that the posing 
of a productive capital presupposes a countervalue). The un- 

State Spending and the System 


productive consumption of capital replaces it on one side, anni- 
hilates it on the other... 20 

Marx is saying that if for some reason part of the surplus value 
available for investment is diverted into some other use, there is 
less new capital available for firms seeking innovations that will 
cut their costs, and the trend towards capital-intensive investment 
will be reduced. The same point was made much more explicitly 
in the 1960s by Mike Kidron — apparently without knowing that 
Marx had spelt the argument out. 21 He pointed out that Marx's ar- 
gument about the falling rate of profit: 

rested on two assumptions, both realistic: all output flows 
back into the system as productive inputs through either 
workers' or capitalists' productive consumption — ideally 
there are no leakages in the system and no choice other than to 
allocate total output between what would now be called in- 
vestment and working class consumption; secondly in a closed 
system like this the allocation would swing progressively in 
favour of investment. 

If the first assumption, that all outputs flow back into the 
system, was dropped — in other words, if some of these outputs 
are lost to the production cycle — then there would be no need 
for investment to grow more rapidly than the labour employed. 
The law of the falling rate of profit would not operate. "Leaks" 
of surplus value from the closed cycle of production/invest- 
ment/production would offset the tendency of the rate of profit 
to fall. 22 

As Kidron put it in a later work: 

In Marx the model assumes a closed system in which all 
output flows back as inputs in the form of investment goods 
or wage goods. There are no leaks. Yet in principle a leak 
could insulate the compulsion to grow from its most impor- 
tant consequences... In such a case there would be no decline 
in the average rate of profit, no reason to expect increasingly 
severe slumps and so on. 23 

The argument is impeccable, and Kidron goes on to suggest the 
form these leaks have taken: 


Understanding the System: Marx and Beyond 

Capitalism has never formed a closed system in practice. Wars 
and slumps have destroyed immense quantities of output, in- 
corporating huge accumulations of value, and prevented the 
production of more. Capital exports have diverted and frozen 
other accumulations for long stretches of time. 24 

As we saw in Chapter Four, Henryk Grossman had recognised that 
imperialism in diverting surplus value overseas had temporarily re- 
duced the upward pressures on the organic composition of capital 
in the domestic economy and the therefore tendency to crisis. He 
also at least partially anticipated Kidron's point about the effect of 
military expenditure. He noted that, while wars were enormously 
destructive of use values, they had the effect of easing the purely 
economic contradictions of capitalism since they "pulverise 
values" and "slow down accumulation". By reducing the tendency 
for accumulation to rise faster than the employed labour force 
they countered the fall in the rate of profit: 

The destructions and devaluations of war are a means of 
warding off the immanent collapse [of capitalism], of creating 
a breathing space for the accumulation of capital... War and 
the destruction of capital values bound up with it weaken the 
breakdown [of capitalism] and necessarily provide a new im- 
petus to the accumulation of capital... Militarism is a sphere 
of unproductive consumption. Instead of being saved, values 
are pulverised. 25 

Military expenditure is a particular form of waste that can appeal 
to capitalists connected to a particular state. For it enhances their 
capacity to struggle for control of worldwide surplus value with 
rival capitalists. It is functional for nationally based complexes of 
capital in the same way that advertising is for individual firms, 
even while wasting resources for the system as a whole. It was 
therefore a characteristic phenomenon of the classical form of im- 
perialism that led to the First World War — and it survives today in 
the massive arms spending of the United States in particular. 

The logic of arms-based economic expansion has escaped many 
Marxist economists. It is absurd, they argue, to see a deduction by 
the state from the total surplus value as somehow countering the 
tendency for surplus value to grow more slowly than total invest- 
ment costs, and so overcoming the fall in the rate of profit. What 

State Spending and the System 


they have failed to understand is that this "absurdity" is just part 
of the greater absurdity of the capitalist system as a whole, of its 
contradictory nature. They have not seen that engaging in military 
competition can be just as much a "legitimate" capitalist goal as 
engaging in economic competition for markets. 

As we saw in the last chapter, one of the greatest followers of 
Marx, Rosa Luxemburg, could not understand how capitalism 
could continually expand the value embodied in means of produc- 
tion without producing more goods for consumption. Similarly, 
these Marxists have not been able to understand how capitalism 
could possibly benefit from continually expanding the means of 
destruction. They have been so bemused by the irrationality of 
what capitalists are doing as to try to deny that this is how the 
system works. 

But such expenditures had enormous implications for capital- 
ism in the latter part of the 20th century. Waste expenditures 
played a contradictory role. They reduced the amount of surplus 
value available for productive investment, so counteracting the 
tendency towards over-rapid accumulation and crisis. But the 
eventual effect in slowing down accumulation was to create a 
whole new series of problems for the system, as we will see in 
Chapter Nine. 

Welfare and the supply of labour power 

Not all the state expenditures listed earlier fall into the unproduc- 
tive category as narrowly defined or into the wider category of 
waste. State-financed research and development (corresponding to 
category (g) in the list above) that feeds through into aiding accu- 
mulation in the wider economy clearly plays a role for those 
capitals that benefit from it, similar to that of dead labour embod- 
ied in means of production. But what of expenditures on health, 
education and welfare services (equivalent to the expenditures (e) 
and (f) of individual capitalists)? Here it is necessary to examine 
something Marx only discusses in passing — the reproduction of 
the working class that capitalism needs for exploitation. 

The first industrial capitalists of the late 18th and early 19th 
centuries in Britain did not have to worry over much about the 
supply of labour power. It was available in abundance once "prim- 
itive accumulation" had driven sufficient peasants from the land. 


Understanding the System: Marx and Beyond 

They assumed they could bend former peasants and their children 
to the discipline of unskilled machine minding, 26 while relying on 
drawing men trained as artisans into the factories for more skilled 
work. For these reasons, Marx, who dealt at length with primitive 
accumulation and the treatment of workers in the factories, virtu- 
ally ignored the problem for capitalists of getting a labour force 
with the right physiques and skills. Yet by the time of his death, the 
spread of capitalist industry to ever newer new sectors of produc- 
tion was making the supply and management of labour 
power — outside as well as inside the factory — something of in- 
creasing concern to those promoting capitalist accumulation. 

The individual capitalist aimed to pay the individual worker 
just enough by the hour, day or week to keep him or her fit and 
motivated to work. But this did not cater for a number of impor- 
tant things if labour power of the right quantity and quality was 
going to be available for the capitalist class as a whole over time. It 
did not take into account the need for workers to learn necessary 
skills nor did it sustain them through periods of unemployment so 
as to be able to supply their labour power when the crisis ended. It 
did not deal with the problem of workers temporarily losing their 
capacity to be productively exploited through illness or injury. 
And it did not provide for the upbringing of working class children 
who would be the next generation of labour power. 27 

There were various ad hoc attempts to deal with each of these 
problems through the 19th century. Religious and other charitable 
funds provided some relief for the unemployed or the sick. 
Pressure was put on working class women to bear the burden of 
child rearing through the propagation of ideologies that treated 
men as the wage earner and men's wages as a "family wage" (even 
though working class women always worked to some extent and a 
man's wage was rarely adequate to keep a family). 28 Some firms 
would provide housing under their own control — and sometimes 
minimal health facilities as well — for their workforces. Groups of 
skilled workers would run funds to provide for periods of unem- 
ployment or sickness. Firms would incorporate into the factory 
system a version of the apprenticeship system of pre-capitalist ar- 
tisanship, with youngsters learning a trade by working under 
skilled workers for five or seven years on minimal wages. 

But over time it became clear that the ad hoc methods were in- 
adequate and that the state had to take over many of the tasks from 
private capitalists and charitable concerns. In Britain it intervened 

State Spending and the System 


as early as the 1834 Poor Law to ensure that the conditions under 
which the unemployed or the infirm could get poverty relief were 
so arduous that those who could work would, however low the 
pay. In 1848 it established a Board of Health to act against the 
spread of diseases in working class areas — which was affecting 
richer areas too. Over the decades it was cajoled into limiting the 
working hours of children and barring women from occupations 
that might damage their capacity to bear and bring up the next gen- 
eration. In the 1870s it moved to set up a state system of elementary 
education and to encourage the building of homes for skilled work- 
ers. Then in the first decade of the 20th century it made the first 
moves to coordinate the various ad hoc measures of the previous 
70 years into national structures to provide minimal social insur- 
ance benefits for unemployment, old age and sickness. 29 The 
impetus to do so came from the shock of discovering in the course 
of recruitment for the Boer War how few of the working class were 
healthy enough to undertake military service. Ann Rogers has sum- 
marised the reaction of the upper and middle class: 

The belief that change was necessary if Britain was to compete 
successfully with Germany and the United States remained cen- 
tral. Whether the argument was formulated by the Fabians or 
by Liberal imperialists the concentration was on the damage 
that poverty was doing to society rather than the misery it 
caused individual workers... The underlying reason for the 
desire to improve the health of the working class was the need 
for a healthier labour force in the factories and the army. 30 

These measures were not simply a result of capitalists getting to- 
gether and deciding what was rational for their system. They came 
into being only after recurrent campaigns involving upper class 
philanthropists with a conservative disdain for the money-grab- 
bing grubbiness of capitalism, middle class moralisers about 
working class behaviour, political opportunists out to get working 
class votes, factory inspectors and doctors with professional con- 
cerns about people's safety and well-being — and, alongside them 
and often independently of them, trade union and socialist ac- 
tivists. But such coalitions framed the projects they pursued in 
terms of what they saw as rational for capitalism. And that meant 
what was necessary to supply it with pools of sufficiently healthy 
and skilled labour power. This was shown clearly by one feature 


Understanding the System: Marx and Beyond 

that characterised the reforms of the early 20th century just as 
much as it had the charitable efforts of the early 19th century. Any 
benefits were always to be provided in such a way as to coerce into 
seeking work all those who were fit and able. The principle of "less 
eligibility" had to apply: getting the benefit must still leave the re- 
cipients worse off than the worst paid work. What is more, the 
benefits were not meant to come from a diversion of value from 
capital to labour, but by a redistribution of income within the 
working class through the "the insurance principle". Weekly pay- 
ments from those able to work were to sustain those unable to do 
so because of sickness or unemployment. 

The role of the state in the supply, training and reproduction of 
labour power grew through the 20th century, reaching a peak in 
the long boom from the mid-1940s through to the mid-1970s, and 
continuing into the new period of crises which followed. All 
through this the "welfare state" continued to be tailored to the in- 
terests of nationally based capitals, even when the impetus for 
extending its role came from below, as during the Second World 
War, when the British Tory politician Quintin Hogg famously de- 
clared, "if you do not give the people social reform, they are going 
to give you social revolution". 31 The British Labour minister of the 
1940s Aneurin Bevan argued that public health measures had 
become part of the system, "but they do not flow from it. In claim- 
ing them capitalism proudly displays medals won in battles it has 
lost". 32 The fact, however, is that those who formulated them — in- 
cluding Bevan — did so in ways that could fit in with the needs of 
the system. 

This has important implications for the labour power that goes 
into such services — and for the people who supply it. There is a 
widespread tendency for Marxists — as well as some non- 
Marxists 33 — to insist that such labour cannot be productive since it 
does not produce commodities directly. But that also applies to 
much labour inside any capitalist enterprise, which is merely a pre- 
condition for other labour that produces the final products. It is 
productive as part of the labour of the "collective worker" 34 in the 
enterprise. A fully trained carpenter or bricklayer can be many 
times more productive than an unskilled one; a fully trained tool- 
maker can do jobs an unskilled labourer is incapable of. The 
labour of those who train them is adding to the capacity of the col- 
lective worker to produce value. And they are exploited, since they 
are paid the value of their labour power, not of the training they 

State Spending and the System 


provide. There can be a debate over exactly how the skills added 
by their labour fit into Marx's categories: are they to be equated 
with plant and equipment as a form of constant capital or as 
simply enhanced labour power, as variable capital? 35 There are 
also debates between individual firms over the merits of undertak- 
ing training programmes. They may gain in the short term, but 
what is to prevent other firms "poaching" their skilled labour 
without ever having paid for its training. 36 Finally, there are argu- 
ments about how to characterise the labour used to train other 
workers: is it "productive" or "indirectly productive"? But there 
should be no doubt about its role in increasing overall potential 
output and productivity: it is part of the total productive labour of 
the firm and of the system as a whole. 37 

A big portion of the labour that goes into the educational 
system plays an identical role in providing the skills capital needs, 
although in this case the skills are not available simply for individ- 
ual capitalists, but for all the capitalists operating from within the 
state that provides it. The training in skills which future workers 
get from a teacher in an educational institution adds to the amount 
of socially necessary labour they can produce in an hour in exactly 
the same way as the training they might get inside an enterprise. 
And the cost of the training is part of the cost of providing labour 
power, just as much as the wage that goes into buying the food, 
clothing and shelter the workers require. Enterprises under 
modern capitalism require labour power with at least minimal 
levels of literacy and numeracy. The teachers who provide this 
have to be considered as part of the collective worker, ultimately 
working for the complex of nationally based capitals that the state 
services. Apologists for capitalism recognise this inadvertently 
when they refer to the provision of education as "adding to social 
capital" and demand "value added" in schools. 

The same general principle applies to health services that cater 
for actual, potential or future workers. Spending on keeping the 
workforce fit and able to work is in reality a part of the wage even 
when it is paid in kind rather than in cash and goes to the workers 
collectively rather than individually. In Marx's terminology, it is 
part of "variable capital". This is absolutely clear in countries like 
the US where healthcare is provided for most workers through in- 
surance schemes provided by their employers. It should be just as 
clear in countries like Britain where the state provides them on 
behalf of the nationally based capitals. The popularly used term 


Understanding the System: Marx and Beyond 

"social wage" is an accurate description. It is just as accurate when 
applied to unemployment benefits available only to those who 
show they are able and willing to work, and to pension schemes 
dependent on a lifetime of labour. The capitalist wants contented 
workers to exploit in the same way that a farmer wants contented 
cows. Workers cannot be expected to labour with any commit- 
ment to their work unless there is some sort of promise that they 
will not starve to death once they reach retirement age. As Marx 
put it, there is a historically and socially determined element to the 
cost of reproducing labour power as well as a physiological one. 

But labour power is not an object like other commodities, 
which are passive as they are bought and sold. It is the living ex- 
pression of human beings. What from a capitalist point of view is 
"recuperation of labour power" is for the worker the chance for 
relaxation, enjoyment and creativity. There is a struggle over the 
social wage just as over the normal wage, even if both are, to a cer- 
tain degree, necessary for capital. 

The problem is compounded from capital's point of view by the 
fact that not all welfare provision is in any sense productive. A 
good portion of it is concerned solely with maintaining the exist- 
ing relations of exploitation. Studies of the schooling of working 
class children in the 19th century emphasise the degree to which 
what was involved was not education in skills so much as incul- 
cating into them discipline and respect for authority. 38 Not until 
late in the 19th century did a concern with basic skills for the 
workforce begin to become a central preoccupation for British 
capitalism facing foreign competition. 39 Today disciplines like eco- 
nomics and sociology are about trying to reproduce bourgeois 
ideology, while others like accountancy are concerned with the un- 
productive redistribution of surplus value among members of the 
capitalist class. 

If capital has no choice but to tolerate these unproductive "ex- 
penses of production", there are other elements in welfare 
expenditure it would love to be able to do without and does its 
utmost to minimise. These go to those who are not needed as 
labour power (the long-term unemployed without needed skills) 
or are incapable of providing it (the chronic sick and disabled). It 
has a similar attitude to provision for the mass of the elderly, but 
is restrained to some degree by its need to give the impression to 
currently employed workers that their future is assured. Marx 
pointed out that there exists, alongside the "reserve army of 

State Spending and the System 


labour", able to enter the active labour force when the system un- 
dergoes periodic expansion (and in the meantime exercising a 
downward pressure on wages), a surplus population in whose 
survival it has no real interest apart from that of warding off re- 
bellion and preventing a demoralising impact on the employed 
working class. 

The history of welfare legislation over the last 180 years has 
been a history of attempts to separate that provision which is nec- 
essary for capital in the same way that wage payments are and that 
which is unnecessary but forced on it by its need to contain popu- 
lar discontent. This finds expression in repeated debates among 
those who would manage national capitalisms over how welfare 
policy interacts with labour market policy, among mainstream 
economists about the "natural" or "non-inflationary" level of un- 
employment, and among sociologists and social work theorists 
about the "underclass". 

The division between social expenditures that are in some way 
productive for capital and those that are non-productive cuts 
across some of the normal ways of dividing up national budgets. 
So education is both training for productive labour and also train- 
ing for unproductive forms of labour (eg in sales promotion or 
finance) and the inculcation of bourgeois ideological values. 
Health services and unemployment benefits both keep the work- 
force fit and ready to provide labour power and are mechanisms 
for maintaining social cohesion by providing at least minimal pro- 
vision for the old, the infirm and the long-term unemployed. These 
ambiguities become important whenever capital finds the costs of 
state provision begin to cut into profit rates. 

At such points states come under the same pressure as do big 
capitals when faced with sudden competition — the pressure to re- 
structure and reorganise their operations so as to accord with the 
law of value. On the one side this means trying to impose work 
measurement and payment schemes on welfare sector employees 
similar to those within the most competitive industrial firms. On 
the other side it means cuts in welfare provision so as to restrict it 
as much as possible to servicing labour power that is necessary for 
capital accumulation — and doing so in such a way that those who 
provide this labour power are prepared to do so at the wages they 
are offered. 

These pressures grow as managing labour power becomes 
more important for the state. In the process, employees working 


Understanding the System: Marx and Beyond 

in the welfare, health and educational sectors who could at one 
stage of capitalist development regard themselves as part of the 
professional middle class — with salaries and conditions compara- 
ble to lawyers or accountants — find themselves subject to a 
traumatic process of proletarianisation. This, as we shall see, adds 
to the problems that beset national capitalist states as they at- 
tempt to cope with sudden crises. Public expenditures become a 
central focus for class struggle in a way in which they were not in 
Marx's time. 

State Spending and the System 


Part Two 




The Great Slump 

An unprecedented crisis 

The deepest slump capitalism had ever known followed by the 
most sustained boom, interspersed with the bloodiest war in 
human history. Such was the course of capitalism in the middle 50 
years of the twentieth century. 

The epicentre of the slump was the United States, which had 
emerged from the First World War as the greatest economic 
power, with 50 percent of global industrial production, overtak- 
ing both victorious Britain and defeated Germany. The onset is 
often identified with the Wall Street Crash of 29 October 1929, 
when the New York stock exchange fell by almost a third. But 
"business was already in trouble before the crash", with auto 
output down by a third in September compared with March 
1929. 1 Over the next three years US industrial production fell by 
about half, and the slump spread across the Atlantic to Europe, 
where there were already incipient signs of crisis. German indus- 
trial production also fell about half and, with a slight delay, 
French fell by nearly 30 percent. Only Britain saw a smaller fall — 
of about 20 percent — but that was because its heavy industries 
were already in a depressed condition. 

By 1932 a third of the workforce in the US and Germany were 
unemployed and a fifth in Britain. Those hit were not only manual 
workers as in previous crises, but white collar employees who 
thought of themselves as belonging to the middle class. Hundreds 
of local banks went bust in the US and some giant banks in Europe 
collapsed spectacularly, destroying people's savings and aggravat- 
ing the general sense of disaster. Hitting all industrial countries at 
once, the crisis destroyed the demand for the output of agricultural 
countries, driving down the prices farmers received and creating 
vast pools of misery. No region of the globe avoided at least some 


decline in output, 2 and world trade fell to a third of its 1929 level. 3 
By comparison, both world output and world trade had grown 
during the previous "Great Depression" of the 1870s and 1880s. 4 

The 1920s boom 

The ideological shock of the crisis was increased by the way capi- 
talism had seemed to have recovered in the preceding years from 
the destruction of the First World War. Industrial output in the US 
had doubled from 1914 to 1929, with the emergence of a host of 
new industries that began to revolutionise patterns of consump- 
tion — radio, rayon, chemicals, aviation, refrigeration, and the 
replacement of horse-borne by motorised transport. The boom in 
the US had a beneficial impact in Europe. Germany, racked by civil 
war in 1919-20 and then unparalleled inflation in 1923, had then 
seen industrial output grow 40 percent above its 1914 level. In 
France industrial production had doubled. The press had dis- 
played an unbounded optimism about capitalism, proclaiming a 
"new era" of endless prosperity. Mainstream economists had been 
just as confident. Alvin Hansen wrote that the "childhood dis- 
eases" of capitalism's youth were "being mitigated", while 
America's most eminent neoclassical economist, Irving Fisher, had 
stated on the eve of the Wall Street Crash that "stock prices have 
reached what looks like a permanently high plateau", and contin- 
ued to exude optimism for some months after, while in Britain 
John Maynard Keynes had assured his students, "There will be no 
further crash in our lifetime". 5 Social democrat Marxists joined in 
the chorus, with Hilferding's theory of "organised capitalism", as 
a system in which the anarchy of the market and the trend towards 
crisis had disappeared. 6 Suddenly they were all proved wrong. 

The initial reaction of mainstream politicians and their fellow 
travellers in the economics profession was to assume that they only 
had to wait a short time and the slump would begin to correct itself. 
"Recovery is just around the corner," as US president Herbert 
Hoover assured people. But recovery did not come in 1930, 1931 
or 1932. And the economic orthodoxy which had been so confident 
in its praise of the wonders of capitalism so recently could not ex- 
plain why — and it still cannot explain why today. 

There have been attempts at explanation. The most common 
among the most orthodox at the time was that articulated by the 


Capitalism in the 20th Century 

English economist Arthur Cecil Pigou. Workers, according to his 
argument, had priced themselves out of their jobs by not accept- 
ing cuts in their money wages. Had they done so, the magic of 
supply and demand would have solved all the problems. Irving 
Fisher belatedly put forward a monetarist interpretation, arguing 
that the money supply was too low, leading to falling prices and so 
cumulatively increasing debt levels. More recent monetarist theo- 
rists put the blame on the behaviour of the central bankers. If only, 
the argument went, the US Federal Reserve Bank had acted to stop 
the money supply contracting in 1930 and 1931, then everything 
would have been all right — the arch monetarist of the post-war 
decades, Milton Friedman, traced its mistakes and the depth of the 
slump back to the death of New York Reserve Bank president 
Benjamin Strong in October 1928. 7 By contrast Friedrich von 
Hayek and the "Austrian" school argued that excessive credit in 
the 1920s had led to "an imbalance in the structure of produc- 
tion", 8 which would be made worse by increasing the money 
supply. Still other economists blamed the dislocation of the world 
economy in the aftermath of the First World War, while John 
Maynard Keynes stressed an excess of saving over investment that 
led to a lack of "effective demand" for the economy's output. 
Finally, there was the claim, still perpetuated in much media com- 
mentary today, that the raising of US tariffs by the Smoot-Hawley 
Act in the summer of 1930 unleashed a wave of protectionism pre- 
venting a recovery that would otherwise have occurred if free 
trade had been allowed untrammelled sway. 

Ever since then the proponents of each view have found it easy 
to tear holes in the arguments of those holding the other views, 
with none being able to survive serious criticism. That is why the 
current Federal Reserve head, Ben Bernanke, sees explaining the 
slump as the ever illusive Holy Grail of his profession. Yet if the 
slump of the 1930s cannot be understood, neither can the chances 
of it recurring in the 21st century be seriously assessed. 

Disentangling the real causes of the slump from this mishmash 
of contradictory argument involves, first of all, looking at what 
really happened during the 1920s. 

Rapid economic growth and the proliferation of new consumer 
goods had encouraged people to see this as a decade of continual 
rises in living standards and enormous productive investment — a 
story that is still frequently accepted today. But in fact wages rose 
by a total of only 6.1 percent between 1922 and 1929 9 (with no 

The Great Slump 


increase after 1925) and the manufacturing workforce remained 
static while industrial production expanded by about a third. 
Michael Bernstein notes that "the lower 93 percent of the non- 
farm population saw their per capita disposable income fall during 
the boom of the late 1920s". 10 The fall in labour's share of total 
income meant that the proportion of national output that could be 
bought with wages fell. The economy could only keep expanding 
because something else filled the resulting gap in demand. 

Many analyses have argued that investment fulfilled this role. 
Gordon Brown tells how much recent literature sees "that the 
most notable aspect of the 1920s was overinvestment". 11 A chas- 
tened Hansen noted in his analysis of the slump that, although a 
"vast sum of $138,000,000,000" of "investment" had "led con- 
sumption" during the 1920s, only half of that was business 
investment, and of that only a third was new investment, ie a mere 
$3 billion a year. 12 In other words, beneath the appearance of 
rapidly expanding investment, the reality was a relatively low level 
of productive accumulation despite the impetus provided by the 
new industries. Other analyses, by Simon Kusznets, 13 Steindl, 14 and 
Gillman, 15 bear this out. 

Only one, stark, conclusion can be drawn from such figures. 
The boom could not have taken place if it had only depended on 
the demand for goods created by productive investment and 
wages. A third element had to be present to prevent the piling up 
of unsold goods and recession in the mid-1920s. As Hansen recog- 
nised, "Stimulating and sustaining forces outside business 
investment and consumption were present... with these stimuli re- 
moved, business expenditures would have been made on a more 
restrictive scale, leaving the economy stagnant if not depressed". 16 

Hansen, as a mainstream economist, even if by now a critical 
one, saw these forces as being "non-business capital expenditures 
(residential building and public construction)" and " the growing 
importance of durable consumer goods financed in large part by a 
billion dollar per year growth of instalment credit" and "rather 
feckless foreign lending". 17 

A classic Marxist analysis of the slump by Lewis Corey puts the 
stress on the growth of luxury consumption, unproductive expen- 
ditures and credit. The 1920s were a decade in which incomes from 
dividends and managerial salaries rose several times faster than real 
wages, 18 until "the bourgeoisie" (including the non-farm petty 
bourgeoisie) were responsible for over 40 percent of consumption, 


Capitalism in the 20th Century 

according to him. 19 Then there was growing expenditure on ad- 
vertising and sales drives as firms sought markets for the growing 
number of goods they were turning out — this expenditure, in the 
form of incomes for sales personnel in these same industries, could 
then create a market for some of the goods businesses were trying 
to sell. A doubling of consumer credit 20 enabled the middle class 
and some layers of workers to buy "on the never never" some of 
the new range of consumer goods, with car sales at a level in 1929 
they were not to reach again until 1953. And finally there were up- 
surges of non-productive speculative investment in real estate and 
the stock market. Such things could not create fresh new surplus 
value to solve the problem of profitability (they merely involved 
funds passing from one capitalist pocket to another). But their by- 
product was unproductive expenditure in new building, new 
managerial salaries and conspicuous consumption, all of which 
absorbed some of the goods being poured out by industry, encour- 
aging further speculation: 

Superabundant capital became more and more aggressive and 
adventurous in its search for investment and profit, overflowing 
into risky enterprises and speculation. Speculation seized upon 
technical changes and new industries which were introduced re- 
gardless of the requirements of industry as a whole... 21 

Spending on new non-residential construction rose by more than 
half over the decade, and was "most intense in the central business 
districts of cities". This was most notable in New York, where 
work on the world's tallest building, the Empire State Building, 
began in 1929 — only for it to be known by 1931 as "the Empty 
State Building". 22 

While the US boomed, there was also a boost to economic ex- 
pansion in Europe with an inflow of American funds that could 
make up for some of the destruction caused by the war — the 
impact of the US Dawes plan of 1924 was particularly important 
in encouraging loans to Germany. 

These factors were already losing their capacity to sustain the 
boom in industry before the Wall Street Crash. There was the be- 
ginning of a recession in 1927, but a brief upsurge of investment in 
heavy industry and autos in 1928-9 pulled the rest of the economy 
forward. 23 Then, in the late spring and early summer of 1929, this 
came to a sudden end, with a sharp fall in fixed investment 24 and 

The Great Slump 


auto production. 25 The expansion of credit and the scale of specu- 
lation that sustained unproductive expenditures had hidden the 
underlying problems right up to the last minute. But once there 
was a single tiny break in the chain of borrowing and lending that 
held it up, the whole edifice was bound to come tumbling down. 
Marx's comment on crises could not have been more apposite: 

The semblance of a very solvent business with a smooth flow 
of returns can easily persist even long after returns actually 
come in only at the expense partly of swindled money-lenders 
and partly of swindled producers. Thus business always ap- 
pears almost excessively sound right on the eve of a crash. 
Business is always thoroughly sound until suddenly the debacle 
takes place. 26 

The recession precipitated a sudden contraction of speculative ven- 
tures and unproductive expenditures, so reducing still further the 
market for industrial output. Faced with declining sales, industri- 
alists were already beginning to borrow from the banks, rather 
than lend to them. Those who had engaged in the speculative 
boom (including both industrialists and banks) now tried to 
borrow more in order to cover their losses after the crash, but bor- 
rowing was now very difficult. Those who could not borrow went 
bust, creating further losses for those who had lent to them. The 
slump spread from one sector of the economy to another. 

Once the decline started there seemed no end to it. Industrial de- 
cline led to pressure on the banks, which in turn deepened 
industrial decline and put more pressure on the banks. But that 
only further exacerbated the disproportion between productive ca- 
pacity and consumer demand, further worsening the crisis in 
industry. As firms tried to sustain sales by competitive price cut- 
ting, profits everywhere fell and with them the willingness even of 
firms that survived to invest. The non-productive expenditures 
that helped to fuel the boom were cut right back as companies 
tried to conserve their funds and the slump grew deeper. 

The position in Europe was no better, with recession also al- 
ready under way when Wall Street crashed. Conditions were 
worst in Germany, the world's second biggest industrial econ- 
omy, which began experiencing an economic downturn in 
1928: 27 "By the summer of 1929 the existence of depression was 
unmistakable", 28 as unemployment reached 1.9 million and the 


Capitalism in the 20th Century 

spectacular failure of the Frankfurt Insurance Company began a 
series of bankruptcies. 

Problems in each country impacted on those in others. There 
had already been an outflow from Germany of some of the 
American funds associated with the Dawes plan before the Crash. 
It now became a torrent as hard-hit American institutions recalled 
their short-term loans from Germany, creating difficulties for 
German industrialists who had been relying on them to finance 
their own industrial overcapacity. Austria's biggest bank, the 
Creditanstalt, went bust in May 1931. Britain was hit by the with- 
drawal of foreign funds from its banks, and broke with the world 
financial system based on the gold standard. This in turn created 
vastly exaggerated fears in the US where the Federal Reserve Bank 
raised interest rates, and there was "a spectacular increase in bank 
failures" 29 and industrial production slumped even more. 

The proliferating impact of the crisis made it easy for people to 
confuse effects with causes. Hence the contradictory interpreta- 
tions from mainstream economists, with some blaming too much 
money, some too little; some central bank interventions, some lack 
of intervention; some excessive consumption, some too little con- 
sumption; some the gold standard, some the turn of states to 
protectionism and competitive currency devaluation; some the ra- 
pidity of the growth of investment, some its tardiness; some the 
forcing down of wages, some their "stickiness" in falling; some the 
scale of indebtedness, some the refusal of the banks to lend. 30 

Yet amidst the contradictory interpretations there was an occa- 
sional partial glimpse that something fundamental was causing 
havoc to the system to which all the mainstream economists and 
politicians were committed. The two economists usually thought 
as representing polar opposite attitudes, Keynes and Hayek, both 
stumbled on the same factor but in such a way that neither they 
nor their apostles took it seriously. 

The main theme running through Keynes's General Theory of 
Employment, Interest and Money was that saving can exceed in- 
vestment, opening up a gap that reduced the effective demand for 
goods, and therefore output, until the reduced level of economic 
activity had cut saving down to the level of investment. This could 
be overcome, he argued, by cutting the rate of interest ("monetary 
measures") and putting more money in people's pockets by tax 
cuts and increased government spending ("fiscal measures"). But 
he recognised that these measures might not work, since people 

The Great Slump 


and firms might still decide to save rather than spend. In particu- 
lar he was "somewhat sceptical of the success of a merely 
monetary policy directed towards influencing the rate of inter- 
est". 31 He is best known for explaining the weakness of 
investment on the crowd psychology of speculators — "when the 
capital development of a country becomes a by-product of the ac- 
tivities of a casino, the job is likely to be ill done" 32 — and the 
flagging "animal spirits" of entrepreneurs. 33 But at points in the 
text he threw in another factor. He argued that the very process 
of expanding capital investment led to a decline in the return on 
it — in "the marginal efficiency" — and therefore to a blunting of 
the spur to further investment. 34 

He believed the declining "marginal efficiency of capital" to be 
an empirical fact which could be found, for instance, in the inter- 
war "experience of Great Britain and the United States". The 
result was that the return on capital was not sufficiently above the 
cost to the entrepreneurs of borrowing as to encourage new in- 
vestment, so tending "to interfere... with a reasonable level of 
employment and with the standard of life which the technical con- 
ditions of production are capable of furnishing". 35 

This he sees as both a long-term trend and a short-term effect 
turning the boom into a slump in each cycle: 

the essence of the situation is to be found in the collapse of the 
marginal efficiency of capital, particularly... of those types of 
capital which have been contributing most to the previous 
phase of heavy new investment. 36 

Keynes's explanation for this was grounded in his overall "mar- 
ginalist" approach, with its acceptance that value depended on 
supply and demand. As the supply of capital increased it would 
grow less scarce, and the value to the user of each extra unit would 
fall until, eventually, it reached zero. 37 This theoretical reasoning 
seems to have been too obscure for most of Keynes's followers. 
The "declining marginal efficiency of capital" hardly appears in 
most accounts of his ideas. Yet it is the most radical single notion 
in his writings. It implies that the obstacles to full employment lie 
with an inbuilt tendency of the existing system and not just with 
the psychology of capitalists. If that is so, there would seem to be 
no point in governments simply seeking to "restore confidence", 
since there is nothing to restore confidence in. 


Capitalism in the 20th Century 

Hayek expressed in passing the same view of what was happen- 
ing to profits, although from a different reasoning. He claimed 
that cyclical crises resulted from disproportions between different 
sectors of production — with "excessive credit" causing the output 
of producer goods to grow too rapidly in the relationship to the 
output of consumer goods. 38 In this way, he believed, he could ex- 
plain the cycle as an inevitable means by which the different 
sectors adjusted to each other, much as Marx saw the crises as able 
partially to resolve internal contradictions in capitalism — but what 
Marx viewed negatively Hayek viewed positively. His theory still, 
however, had a big hole in it. Why should the lag between the sec- 
tors cause so much greater problems than in previous decades? 
Why, in particular, should the production goods sector not keep 
growing fast enough to pull the rest of the economy behind it? The 
answer he put forward in passing in 1935 (and which never made 
it into the Hayekian orthodoxy) was that profitability fell with the 
expansion of what he called "roundabout processes of produc- 
tion" — that is processes with a high ratio of means of production 
to workers, or as Marx would have put it, a high organic compo- 
sition of capital: 

That [profit] margins must exist is obvious... if it were not so, 
there would exist no inducement to risk money by investing it in 
production rather than to let it remain idle... These margins 
must grow smaller as the roundabout processes of production 
increase in length... 39 

In other words, both Keynes and Hayek recognised, though they 
could not clearly explain, the feature which is central to Marx's 
theory of capitalist crisis — the downward pressures on the rate 
of profit. 

In fact, Marxist theory can provide an explanation of the slump 
which avoids the contradictions of all the mainstream theories. 
Profit rates in the US had fallen about 40 percent between the 
1880s and the early 1920s, 40 those in Britain were already in de- 
cline before 19 14 41 and those in Germany had failed "to return to 
their pre-war 'normal' level". 42 Such declines could be traced back 
to long-term rises in the ratio of investment to the employed work- 
force (the "organic composition of capital"), about 20 percent in 
the case of the US. 43 American profitability was able to make a 
small recovery through the 1920s on the basis of a rise in the rate 

The Great Slump 


of exploitation. But the rise was not sufficient to induce produc- 
tive investment on the scale necessary to absorb the surplus value 
accumulated from previous rounds of production and exploita- 
tion. Firms were torn between the competitive pressures to 
undertake investment in massive new complexes of plant and 
equipment (the Ford River Rouge plant, completed in 1928, was 
the largest in the world), and the fear that any new equipment 
would not be profitable. Some would take the risk, but many did 
not. This meant that the big new plants that came into operation 
towards the end of the boom necessarily produced on too big a 
scale for the market, flooding it with products which undercut the 
prices and profits of old plants. New investment came to a halt, 
leading to a fall in employment and consumption that worsened 
the crisis. 

The blind self-expansion of capital had led to an ever greater 
accumulation of constant capital compared with living labour. 
This expressed itself on the one side by a rate of profit consider- 
ably lower than a quarter of a century before and on the other by 
employers holding back wages and so diminishing the share of 
output that could be absorbed by workers' buying power. 
"Overproduction" and the low rate of profit were aspects of the 
same process that would eventually lead to the slump. An up- 
surge of unproductive expenditures and credit could postpone 
this, but do no more. The stage was set for a deep crisis — and it 
only required scares in the stock exchange and the financial sec- 
tors for it to occur. 

The crisis in these respects was very similar to those described 
by Marx in passages where he analysed the crises of 1846 and 
1857 in Britain. 44 It also fits with Grossman's interpretation of 
Marx's account, with its stress on the way in which firms are 
pushed to undertake new investments that threaten to make the al- 
ready low rate of profit drop to such an extent that much of the 
new investment becomes unprofitable so as to cause all investment 
to freeze up. 45 

But there remains something else that has to be explained — 
why the automatic market mechanisms which had always in the 
past been capable, ultimately, of lifting the economy out of crisis 
no longer seemed to be working. Three years after the crisis 
started, industrial production in the US, Germany, Britain and 
France was still declining. To explain this it is not enough just 
to look at the tendency of the rate of profit to fall. The other 


Capitalism in the 20th Century 

long-term trend in Marx's account — the concentration and cen- 
tralisation of capital as the system aged — also played a role, as 
was suggested in Chapter Three. 

At first it delayed the outbreak of the crisis. The Bolshevik econ- 
omist Preobrazhensky, attempting to analyse the crisis in 1931, 
argued that there had been a big change since Marx's time. Then 
recessions had led to the elimination of inefficient firms and al- 
lowed the rest to enter into new rounds of accumulation. But now 
the system was dominated by big near-monopolies which were 
able to prevent the liquidation of their inefficient plants. They 
would do their utmost to keep their operations intact, even if it 
meant their plants operating at only a fraction of their usual ca- 
pacity and cutting investment to the minimum. This produces a 
"thrombosis in the transition from crisis to recession" and pre- 
vents — or at least delays — the restructuring necessary for an 
emergence from the crisis: "Monopoly emerges as a factor of 
decay in the entire economy. Its effects delay the transition to ex- 
panded reproduction". 46 

Once the crisis erupted, the sheer size of individual industrial or 
financial capitals was such that the collapse of any one of them 
threatened to drag others down with it. The banks would lose the 
money they had lent it, and so cut off credit to other firms. Its sup- 
pliers would be driven out of business and so damage other firms 
dependent on them. And the end to its spending on investment and 
wage bills would reduce demand in the economy as a whole. The 
delayed crisis was now a much magnified one, which could not au- 
tomatically resolve itself. The response of the big capitals was to 
turn to the state for "bail-outs" to keep the system going. 

The turn to state capitalism 

At first governments continued to place their hopes in the untram- 
melled operation of the market mechanism, with only limited 
actions to protect some banks. But the crisis continued to get 
worse, particularly in the US and Germany. Enormous damage 
was being done to capital itself as it tried to operate with little 
more than half its previous production levels. At the same time 
desperation was leading the mass of people to look to remedies 
that might turn the whole of society over. Major sections of capital 
began to look for an approach that might solve their problems, 

The Great Slump 


however much it broke with old ideological shibboleths. By the 
summer of 1932 the head of General Electric in the US was cam- 
paigning for state intervention. The shift which eventually took 
place was from forms of monopoly capitalism in which the state 
kept in the background, providing services to big capital but keep- 
ing away from attempting to direct it, to forms in which it 
attempted to ensure the international competitiveness of nation- 
ally based capital. That came to involve consciously restructuring 
industry by shifting surplus value from one section of the economy 
to another. 

The shift had been foreshadowed in the later stages of the First 
World War, when the state had taken draconian powers to force 
individual capitals to concentrate their efforts on the military 
struggle. But in the aftermath of the war, the state had given up the 
power it had acquired. Now the sheer scale of the crisis forced a 
rethink. Political crises in the US and Germany brought govern- 
ments to power early in 1933 prepared to implement radical 
change in order to save capitalism from itself. 

In the US this took the form of Roosevelt's New Deal. It ex- 
tended already existing public works schemes to mop up some of 
the unemployment, guaranteed the funds of the banks which had 
not gone bust, encouraged the self-regulation of industry through 
cartels, destroyed crops so as to raise agricultural prices and in- 
comes, carried through very limited experiments in direct state 
production and also made it a little easier for unions to raise wages 
(and therefore the demand for consumer goods). Federal expendi- 
ture, only around 2.5 percent of GDP in 1929 reached a peacetime 
peak of just over 9 percent in 1936. It was a recognition that cap- 
italism in its monopoly stage could no longer solve its problems 
without limited state intervention. But it was still limited interven- 
tion: federal expenditure fell back in 1937. 

Such timidity could have only a limited impact on the crisis. All 
the efforts of the New Deal could not push the upturn that began 
in the spring of 1933 beyond a certain point. The number of un- 
employed fell by 1.7 million — but that still left 12 million jobless. 
It was not until 1937 — eight years after the start of the crisis — that 
production reached the 1929 figure. But even then fixed invest- 
ment in industry remained low 47 and there was 14.3 percent 
unemployment. Yet this "miniboom" gave way in August 1937 to 
"the steepest economic decline since the history of the US" which 
"lost half the ground gained by many indexes since 1932". 48 


Capitalism in the 20th Century 

The 1920s had shown that the non-productive expenditures as- 
sociated with monopoly capital (marketing expenditures, 
advertising, speculative ventures, luxury consumption) could post- 
pone crisis but not stop its eventual impact being greater than 
previously. The 1930s showed that "pump priming" by govern- 
ments might produce a shortlived and limited revival of 
production, but could not give a new lease of life to the system 
either. A more profound change in the direction of state capitalism 
was needed. 

From slump to war 

It was here that the German and Japanese examples were signifi- 
cant. The major sections of their ruling classes accepted political 
options that subordinated individual capitalists to programmes of 
national capitalist accumulation imposed by the state while re- 
pressing the working class movement. The major capitalist groups 
remained intact. But from now on they were subordinated to the 
needs of an arms drive which they themselves supported. 
Armaments and the expansion of heavy industry drove the whole 
economy forward, providing markets and outlets for investment, 
as wages lagged behind rising output and profit rates were par- 
tially restored. 

In Germany such methods pulled the economy right out of the 
slump (after two years of less effective "pump priming") and kept 
it booming while the American economy was slumping again in 
1937. By 1939 output had climbed 30 percent above the 1929 
level and unemployment had fallen from six million to 70,000, 
with the creation of eight million new jobs. 49 Most of the new pro- 
duction went into arms and the heavy industries that provided 
military preparedness, but a tenth of increased output did go into 
raising private consumption. 50 And the economic expansion itself 
paid for a large percentage of the cost of fuelling the boom, with 
only about a fifth of government spending being covered by a bud- 
getary deficit. In effect, the Nazi dictatorship was able to ensure 
that new investment took place, even though initial profit rates 
were low. 

However, there were major problems with any such policy. 
Germany was not a self-contained economic unit. The forces of 
production internationally had long since developed to the point 

The Great Slump 


where they cut across national boundaries, and there was a grow- 
ing need for certain strategic imports as the armaments boom took 
off. The only way to overcome this while keeping the German 
economy self-contained, and therefore immune to international re- 
cessionary pressures, was to expand the boundaries of the German 
Reich so as to incorporate neighbouring economies, and to subor- 
dinate their industries to the German military drive. 

The logic of state-directed monopoly capitalism led to a form of 
imperialism Lenin had referred to in 1916 — the seizure of "highly 
industrialised regions". 51 Beyond a certain point such expansion 
led to inevitable clashes with other great powers which feared 
threats to their own empires and spheres of influence. As they re- 
acted by building up their own armed forces, the German and 
Japanese regimes in turn had to direct even more of the economy 
towards arms — and to reach out to grab new territory — in order 
to "defend" the lands they had already grabbed. This provided 
their capitalists with new sources of surplus value to counter any 
downward pressure on profit rates. But at the same time it in- 
creased the hostility of the existing empires — leading to the need 
for a greater arms potential and further military adventures. The 
breaking points were the German seizure of western Poland and 
the Japanese onslaught on Pearl Harbor. 52 

Just as deepening slump in each major capitalist country had fed 
into the slumps developing elsewhere, so now did the path out of 
the slump through military state capitalism. 

British and American imperialism could only defend their 
own positions in the world after the fall of France in 1940 and 
Pearl Harbor in 1941 by moving on from the half baked state- 
directed capitalism of the mid-1930s to fully militarised 
economies of their own. The British state took charge of all 
major economic decisions, directing which industries should get 
raw materials and rationing food and consumer goods, with the 
civilian economy reduced to a mere adjunct of the centrally or- 
ganised war economy. The US government "not only controlled 
the armaments sector of the economy, which represented about 
half the total production of goods. The state decided what con- 
sumer goods should be produced and what consumer goods 
should not be produced". 53 It spent huge sums building arma- 
ments factories which it handed over to private corporations to 
run. Government capital expenditure in 1941 was 50 percent 
higher than the country's entire manufacturing investment in 


Capitalism in the 20th Century 

1939, and in 1943 the state was responsible for 90 percent of all 
investment. 54 Again a militarised state-dominated economy 
seemed to provide answers to the problems that had faced the 
economy before the war. Nine million unemployed became less 
than one million within three years, and there was a growth in 
the civilian economy despite the vast expenditure on non-pro- 
ductive output. Total output doubled between 1940 and 1943, 
and consumer expenditure in 1943 — even when measured in 
1940 prices — exceeded those of earlier years. 55 The war econ- 
omy could achieve what eight years of the New Deal could 
not — full employment of the productive capacity of the largest 
of the ageing capitalisms. As John Kenneth Galbraith has noted, 
"The Great Depression of the 30s never came to an end. It 
merely disappeared in the great mobilisation of the 40s". 56 

The Russian variant 

There was one other major economy where state direction seemed 
to provide an alternative to being torn apart in the maelstrom of 
the world system. This was the USSR. In the 1930s nearly all com- 
mentators saw it as based on radically different principles to those 
of Western capitalism — and this view persisted among many right 
up until its implosion in 1989-91. The right defined it simply as 
"totalitarian", as if there was no dynamic to its economy, and 
many on the left adopted a mirror image view, speaking of it as 
"communist" or "socialist", or those who were more critical as 
"post-capitalist" 57 or a "degenerated workers' state" 58 . All these 
different approaches assumed a high degree of continuity between 
the Soviet system as it operated in the 1930s and the revolutionary 
state established in 1917. 

But the central mechanisms directing the Soviet economy 
were not established during the revolution, but in 1928-9 under 
the impact of a profound economic and political crisis. By that 
time little remained of the revolutionary democracy that had 
characterised the country in the immediate aftermath of the 
October Revolution of 1917. A new bureaucratic layer had in- 
creasingly concentrated power in its own hands amidst the 
devastation of an already economically backward country suf- 
fering from three years of world war followed by three years of 
civil war. Nevertheless, the driving force behind the economy 

The Great Slump 


through to the mid-1920s remained the production of goods to 
satisfy the needs of the population, and living standards rose 
from the abysmal levels of the war and civil war years, even if 
bureaucrats' living standards rose disproportionately more than 
those of workers and peasants. 

Then in late 1928 a wave of panic hit the bureaucracy in the 
face of warlike threats from Britain and a domestic crisis as peas- 
ants held back supplies of food, creating hunger in the cities. 59 
Afraid of losing their control over the country through a combina- 
tion of rebellion at home and armed pressure from abroad, the 
bureaucracy, led by Joseph Stalin, turned pragmatically to a series 
of measures that involved super-exploitation of the peasantry and 
the working class in order to build the industry the country lacked. 
The cumulative effect was to push the whole economy towards a 
new dynamic other than that of fulfilling people's needs — a dy- 
namic ultimately determined by military competition with the 
various Western states. 

As the Czech historian Michael Reiman has said: 

There were not enough resources to guarantee the proposed 
rate of industrial growth. The planning agencies therefore de- 
cided... to balance the plan by means of resources the economy 
did not yet have at its disposal... The fulfilment of the plan de- 
pended on a very brutal attack on the living and working 
conditions of industrial workers and the rural population... 
This was a plan of organised poverty and famine. 60 

Stalin, justifying the subordination of everything else to accumu- 
lation, insisted, "We are fifty or a hundred years behind the 
advanced countries. We must make good this lag in ten years. 
Either we do it or they crush us". 61 "The environment in which we 
are placed. home and abroad. ..compels us to adopt a rapid 
rate of growth of our industry". 62 

In undertaking the task of accumulation, the bureaucracy sub- 
stituted itself for a capitalist class that no longer existed. But the 
methods it used were essentially those of capitalist industrialisa- 
tion elsewhere in the world. "Collectivisation" — in reality the state 
takeover of the land — increased the proportion of agricultural 
output available for industrial accumulation while driving a very 
high proportion of the peasantry from the land, just as enclosures 
had for England's early capitalists. The growing industries were 


Capitalism in the 20th Century 

mainly manned by wage labour — but some subordinate tasks were 
carried out by some millions of slave labourers. The rights workers 
had held onto through the 1920s were abolished. 

Control of the economy by a single centralised state bureau- 
cracy with a monopoly of foreign trade meant accumulation could 
proceed without interruption, as in the militarised state monopoly 
capitalisms of the West. But the economy could not be isolated 
completely from the wider world system, any more than those of 
Germany and Japan could in the late 1930s. Importing machinery 
for industrialisation from the West depended on export earnings 
from grain at a time of falling world prices — and that depended on 
the state seizing the grain from starving peasants, some millions of 
whom died. Preobrazhensky noted, "As exporters we [the USSR] 
are suffering severely from the world crisis". 63 

There was, however, a relative isolation from the world econ- 
omy, and this meant the accumulation could proceed as long as 
there was some surplus value, regardless of the rate of profit at any 
particular time. This did not, however, overcome economic con- 
tradictions. Fulfilling the production plans for heavy industry and 
armaments invariably involved diverting resources to them from 
consumer goods industries, whose output fell even as the economy 
as a whole expanded at great speed. Such an outcome was the op- 
posite of "planning" in any real sense of the word. If two of us 
plan to go from London to Manchester but one of us ends up in 
Glasgow and the other in Brighton, then our "plan" did not guide 
our action. The same was true of Soviet planning. As in the West 
competitive accumulation produced a dynamic of growth on the 
one hand and of chaos, inefficiency and poverty on the other. It 
also produced a tendency to imperialist expansion beyond na- 
tional borders, as was shown in 1939 when Stalin divided Eastern 
Europe with Hitler, taking half of Poland, Estonia, Lithuania and 
Latvia — only to find in 1941 that Hitler had set his eyes on seizing 
and pillaging the USSR for German capitalism. 

Balance sheet of a decade 

In the 1930s there had been a widespread feeling among the sup- 
porters of capitalism that it was in deep trouble; among its 
opponents that it was finished. Lewis Corey had written of the 
"decline and decay of capitalism", 64 John Strachey that "there can 

The Great Slump 


only exist for the capitalist areas of the world an ever more rapid 
decay" with "the permanent contraction of production", 65 
Preobrazhensky of "the terminal crisis of the entire capitalist 
system", 66 Leon Trotsky of "the death agony of capitalism". 67 
Their prophesies did not seem absurd at a time when the support- 
ers of capitalism were tormented by worries as to what had gone 
wrong with their supposedly infallible system. Yet the desperate 
turn to state capitalism and massive arms production allowed the 
system to enter into a new phase of expansion. The question re- 
mained: for how long? 


Capitalism in the 20th Century 


The Long Boom 

The "Golden Age" of Western capitalism 

Many economic forecasters expected the world economy to slip 
into crisis again after the war, after a brief period of boom as in 
1919. It did not happen. What followed was the longest boom that 
capitalism had ever known — what is often now called "the golden 
age of capitalism", or in France, "the glorious thirty years". By the 
1970s American economic output was three times the 1940 level; 
German economic output was five times the (depressed) level of 
1947; French output up fourfold. A thirteen-fold increase in in- 
dustrial output turned Japan, still thought of as a poor country in 
the 1940s, into the second largest Western 1 economy after the US. 
And along with economic growth went rising real wages, virtually 
full employment and welfare provision on a scale people had only 
been able to dream of previously. 

Conditions were very different in Asia, Africa and Latin 
America — what became known as the "Third World" after the 
Bandung conference of 1955. There massive poverty remained the 
lot of the vast mass of people. But the European powers were 
forced to relinquish their colonies, and increased per capita eco- 
nomic growth 2 created the expectation that eventually the 
economically "less developed" countries would begin to catch up 
with the most advanced. 

It became the orthodoxy on both the right and much of the 
left to proclaim that the contradictions in the system perceived 
by Marx had been overcome. The key change, it was argued, 
was that governments had learnt to intervene in the economy to 
counteract tendencies to crisis along the lines urged in the 1930s 
by John Maynard Keynes. All that was needed for the system to 
work was for the existing state to disregard old free market or- 
thodoxies and to intervene in economic life to raise the level of 


spending on investment and consumption. This could be done 
either by changes in interest rates ("monetary measures") to en- 
courage private investment, or through increasing government 
expenditure above its tax revenues ("fiscal measures"). "Deficit 
financing" of the latter sort would increase the demand for 
goods and so the level of employment. It would also pay for 
itself eventually through a "multiplier effect" (discovered by 
Keynes's Cambridge colleague Richard Kahn). The extra work- 
ers who got jobs because of government expenditures would 
spend their wages, so providing a market for the output of other 
workers, who in turn would spend their wages and provide still 
bigger markets. And as the economy expanded closer to its full 
employment level, the government's revenue from taxes on in- 
comes and spending would rise, until it was enough to pay for 
the previous increase in expenditure. 

These two measures were soon seen as the archetypal 
"Keynesian" tools 3 for getting full employment and accepted as es- 
sential for economic management by both Conservative and social 
democratic politicians in the 1940s, 1950s, 1960s and early 
1970s. Keynes had, as we saw in the last chapter, expressed more 
radical notions at points, notably the contention that the very 
process of expanding capital investment led to a decline in the 
return on it — "the marginal efficiency of capital". 4 He had even 
gone so far as to urge the gradual "euthanasia" of the "rentier" 
who lives off dividends 5 and to argue that "a somewhat compre- 
hensive socialisation of investment will prove the only means of 
securing an approximation to full employment". 6 But Keynes him- 
self shied away from these more radical insights — "in practice he 
was very cautious indeed", 7 writes his ultra-moderate biographer 
Robert Skidelsky, and the version of Keynesianism 8 that hege- 
monised mainstream economics for the 30 years after the Second 
World War purged Keynes's theory of its radical elements. For this 
reason, the radical Keynesian Joan Robinson denounced it as 
"bastard Keynesianism". 9 

Mainstream economics believed in those years that it had the 
capacity to enable governments to do away with the crises that 
had plagued capitalism since the early 19th century. The capitalist 
system could now, the orthodoxy preached, deliver endless pros- 
perity, rising living standards and a decline in the level of class 
struggle — providing governments accepted its diktats and avoided 
the "mistakes" of 1929-32. 


Capitalism in the 20th Century 

John Strachey had been by far the best known Marxist writer 
on economics in Britain in the 1930s. His books, The Nature of 
Capitalist Crisis, The Coming Struggle for Power and The Theory 
and Practice of Socialism had taught Marxist economics to a 
whole generation of worker activists and young intellectuals, with 
the message that capitalism could not escape from recurring and 
ever deeper crises. Yet by 1956 he was arguing, in his book 
Contemporary Capitalism, that Keynes had been right and Marx 
wrong on the crucial question of whether the capitalist crisis could 
be reformed away. 10 Keynes's only mistake, Strachey held, was that 
he failed to see that the capitalists would have to be pressurised 
into accepting his remedies: "The Keynesian remedies... will be op- 
posed by the capitalists certainly: but experience shows they can 
be imposed by the electorate". 11 

The belief that Keynes's ideas were responsible for the long 
boom persists today, with a widespread view on the left that the 
abandonment of those ideas is responsible for the crises of recent 
years. This is essentially the position put forward by the journalists 
Dan Atkinson and Larry Elliot in a series of books, 12 the Observer 
columnist Will Hutton 13 and the radical economic consultant 
Graham Turner. 14 A version of it is accepted by some Marxists. 
Gerard Dumenil and Dominique Levy ascribe the post-war growth 
to a "Keynesian" approach by industrial capital, in which accu- 
mulation was based on a "compromise" with working class 
organisations on the terrain of the welfare state. 15 David Harvey 
presents a picture of capitalism expanding on the basis of "a class 
compromise between capital and labour" in which "the state 
could focus on full employment, economic growth and the welfare 
of its citizens", while "fiscal or monetary policies usually dubbed 
'Keynesian' were widely deployed to dampen business cycles and 
to ensure reasonably full employment". 16 

Yet the most amazing fact about the period in which 
Keynesianism reigned supreme as the official economic ideology 
was that the measures it proposed for warding off crises were not 
used. The economy expanded despite their absence until the 1960s 
in the US and the 1970s in Western Europe and Japan. 

As R C O Matthews long ago pointed out, the economic ex- 
pansion of the post-war years in Britain did not depend on the 
specific Keynesian "remedies" to recurrent crises of budget deficits 
or a higher level of government investment than in the pre-war 
years. 17 Meghnad Desai has noted, "In the USA Keynesian policies 

The Long Boom 


were slow to be officially adopted... They finally triumphed with 
the Kennedy-Johnson tax cut of 1964". 18 That was after the Great 
Boom had already lasted 15 years (25 years if you exclude the 
shortlived recession of the late 1940s). The same point is made for 
Germany by Ton Notermans: "Countercyclical demand manage- 
ment policies were only pursued in Germany... during the 
1970s". 19 In so far as government intervention was used to deter- 
mine the speed of the economy, it was to slow down booms, not 
to avert recessions, as with the "stop go" policies of British gov- 
ernments faced with balance of payments problems in the 1950s 
and 1960s. Michael Bleaney, re-analysing the figures used by 
Matthews and others, concludes that Keynesianism played little 
role in the West European long boom, and only a limited one in 
the US. And he notes that it was the big increase in US levels of 
military expenditure compared with the pre-war years that pro- 
vided most of the "fiscal stimulus": "Largely because of much 
higher defence spending, total government spending on goods and 
services increased by nearly 9 percent of potential GNP". 20 

The explanation of the boom as a result of Keynesian policies is 
often combined with references to a "Fordist" period in which the 
great capitalist corporations accepted a compromise with workers 
based on wages high enough to buy a continually increasing 
amount of output. The French economist Michel Aglietta, for in- 
stance, has argued that "Fordism" regulated "private working 
class consumption" by "generalising the wage relation" to guar- 
antee "the maintenance cycle of labour power". 21 So, for him and 
his "Regulation School" version of Marxism, Keynes is the 
prophet of Fordism, with Keynes's criticism of neoclassical eco- 
nomics and his notion of "effective demand" a partial recognition 
of the need for production and consumption to be integrated at a 
certain stage of capitalist development. 

Certainly, one element in the dominant state interventionist ide- 
ology of the post-war decades was the contention that welfare 
provision could counterbalance cyclical ups and downs in the 
demand for consumer goods. The "supply side" need of capital to 
ensure the reproduction of labour power for it to exploit (which we 
have looked at in Chapter Five) seemed to coincide with "demand 
side" worries about keeping markets expanding. Promises to 
expand welfare provision also suited social democrat and Christian 
Democrat parties in Europe as a way of winning votes and luring 
workers away from the Communist parties to their left. Yet none 


Capitalism in the 20th Century 

of this is adequate to explain why the global economy should boom 
in the post-war years after slumping pre-war. 

What is more, there was no conscious policy by the "Fordist" 
managers of mass production industries to opt for such a supposed 
"Keynesian" policy of raising real wages and welfare provision. As 
Robert Brenner and Mark Glick say, US capital never: 

resigned itself to the principle of maintaining labour's share or 
failed to fight tooth and nail to limit the degree to which wages 
kept up with the cost of living or with productivity. There was 
never anything resembling a generalised "social contract" on 
how revenue was to be divided between investment and con- 
sumption or between profits and wages. 22 

The reality was that as capitalism expanded in the post-war 
decades, the full employment that resulted forced employers and 
the state to pay much more attention than previously to reproduc- 
ing labour power and deflecting working class discontent. Both the 
conventional Keynesian account and "Regulation" theory confuse 
causes with effects. In the process they fail to account for the most 
significant feature of the post-war decades: the rate of profit in the 
US was between 50 and 100 percent higher than in the four 
decades before the Second World War. And it more or less sus- 
tained that higher level until the late 1960s. 23 It was this which 
explained why capitalists kept investing on a scale sufficient to 
keep the economy booming without most states needing even to 
try using the "counter-cyclical measures" suggested by Keynes. 
But how were such high profit rates achieved and sustained along- 
side rapidly rising real wages? 

Part of the answer lies in the impact of the slump and the war. 
Some firms had gone bankrupt in the slump. Much capital had 
been written off. Restructuring through crisis had begun to per- 
form some of its old role of allowing capital to undertake renewed 
accumulation with a lower rate of profit. The destruction of the 
war provided further assistance. Vast amounts of investment 
which would otherwise have raised the ratio of investment to 
labour (and therefore profits) were instead used for military pur- 
poses. Shane Mage, for instance, estimated the combined effect of 
the crisis of the 1930s and the Second World War on the US econ- 
omy: "Between 1930 and 1945 the capital stock of the US fell 
from 145 billion dollars to 120 billion dollars, a net disinvestment 

The Long Boom 


of some 20 percent". 24 Written off was an amount equal to a fifth 
of the pre-existing accumulated surplus value plus all the addi- 
tional surplus value produced over those 15 years. Meanwhile, 
capitalists in the defeated states, Germany and Japan, emerged 
from the war with much of their capital destroyed. They had no 
choice but to write off much of the value of old investments as they 
began accumulation afresh, with a skilled labour force forced to 
accept low wages by the massive unemployment resulting from 
military devastation. 

But these factors are not, in themselves, a sufficient explanation 
for the length and continuity of the boom. They do not explain 
why profit rates did not resume their downward slope once new 
productive investment came into effect. Had capitalism continued 
on its pre-war trajectory there would have been crises at least 
every ten years or so. Yet, although there were periodic dips in 
growth rates, sometimes described as "growth recessions", there 
was only one brief spell of falling output in the US (in 1949) and 
none in the other major industrial countries for more than a quar- 
ter of a century. 

Attempts have been made to explain the boom as a result of 
rapid technological innovation, the waves of immigration of 
young workers in the 1950s and 1960s, or the cheapening of raw 
materials from the non-industrial countries. But such things had 
not been able to prevent cyclical crises previously. Technological 
innovation might have reduced the cost of each unit of new in- 
vestment, but it would also have reduced the life span of old 
investments, so increasing deductions from profits due to depreci- 
ation costs; massive immigration to Britain from Ireland and to the 
US from Europe had characterised the 19th century without stop- 
ping pressures on profit rates; the cheapening of raw materials was 
in part caused by the way the boom itself encouraged capitalists to 
produce synthetic substitutes within the industrial economies (ar- 
tificial fibres, plastics, etc). 

There was, however, one new factor that could explain what 
was happening. There was an unprecedented level of peacetime 
arms spending. It had been only a little over 1 percent of GNP in 
the United States before the war. Yet post-war "disarmament" left 
it at 4 percent in 1948, and it then shot up with the onset of the 
Cold War to over 13 percent in 1950-53, remaining between five 
and seven times the level of the inter-war years throughout the 
1950s and 1960s. 


Capitalism in the 20th Century 

The military consumed an enormous quantity of investible sur- 
plus value that would otherwise have gone into the productive 
economy — according to a calculation by Michael Kidron, an 
amount equal to 60 percent of US gross fixed capital formation. 
The immediate impact of such spending was to provide a market 
for the output of major industries: 

More than nine-tenths of the final demand for aircraft and parts 
was on government account, most of it military; as was nearly 
three-fifths of the demand for non-ferrous metals; over half the 
demand for chemicals and electronic goods; over one-third the 
demand for communication equipment and scientific instru- 
ments; and so on down the list of eighteen major industries 
one-tenth or more of whose final demand stemmed from gov- 
ernmental procurement. 25 

The role of military expenditure has been ignored by most main- 
stream Keynesian accounts of the post-war boom and by many 
Marxists. On both sides there has been a tendency to identify cap- 
italism with the pure "free market" form it took for a brief period 
in Britain in the 19th century and to see the state and the military 
as extraneous to it. Missing has been any sense of the changes that 
had already begun to be analysed by Hilferding, Bukharin and 
Lenin, let alone the further transformations brought about 
through slump, war and the Cold War. 

Some Marxists and a few Keynesians did, however, grasp one 
important impact of arms spending. It provided a market for the 
rest of the economy that was not affected by the ups and downs of 
the wider economy — a buffer that limited the downward move- 
ment of the economic cycle. So the American Marxists Paul Baran 
and Paul Sweezy could see arms spending as an important mecha- 
nism for absorbing an ever growing "surplus" and overcoming 
overproduction. 26 They could not, however, explain why taxation 
to pay for it did not have the effect of reducing demand elsewhere 
in the economy. And, as Michael Bleaney has pointed out, the mil- 
itary purchases of the US government could not have played a 
major direct role in boosting the European economies. 27 

The account of the impact of waste expenditure (see Chapter 
Five) on the dynamic of the wider economy provided by Kidron 
was able to deal with such problems, since its starting point was not 
"underconsumptionism" but the rate of profit. Arms expenditure, 

The Long Boom 


like "unproductive" expenditures, might be a deduction from prof- 
its in the short term, but in the long term it had the impact of 
reducing the funds available for further accumulation and so 
slowed the rise in the ratio of investment to the employed labour 
force (the "organic composition of capital"). 

Kidron's logic found empirical confirmation in what actually hap- 
pened to the organic composition of capital. Its rise in the post-war 
decades in the US was much slower than in the pre-slump decades. 28 
It was also much lower than that which occurred in post-war 
Europe, where the proportion of national output going into arms 
spending was considerably lower than in the US. 29 

Arms, accumulation and planning 

The arms economies were not a result of a conscious strategy 
aimed at warding off slumps. They followed from the logic of im- 
perialist competition in the Cold War era. But sections of capital 
certainly appreciated their effects in keeping the boom going. 
"Military-industrial complexes" emerged, drawing together the 
military and those in charge of the arms industries, which had a 
direct interest in pushing forward the inter-imperialist conflicts. 
They were able to unite the ruling class as a whole behind their 
policies not only because of fear of the rival power, but also be- 
cause of the effect of arms budgets in sustaining accumulation. 

John Kenneth Galbraith described in the 1960s the inter-relation 
between government expenditure and what he termed the "planning 
system" by which each large corporation planned its investments 
many years in advance: 

Although there is a widespread supposition to the contrary, this 
increase [in state expenditures]... has the strong approval of the 
businessmen of the planning system. The executive of the great 
corporation routinely opposes prodigality in government ex- 
penditure. But from his pleas for public economy defence 
expenditures are meticulously excluded. 30 

One effect of such expenditures was to allow the great corpora- 
tions to undertake long-term planning of their own investments 
with the assurance that they would be able to make a profit on 
them and turn it into cash by selling their goods ("realising their 


Capitalism in the 20th Century 

surplus value", to use Marx's terminology). This changed their in- 
ternal operations in ways which seemed to contradict the usual 
assumption about capitalist behaviour being motivated by short- 
term profit requirement and price competition for markets. 
Galbraith painted a picture of how the situation appeared: 

The market is superseded by vertical integration. The planning 
unit takes over the source of supply or the outlet; a transaction 
that is subject to bargaining over prices and amounts is thus re- 
placed with a transfer within the planning unit... As viewed by 
the firm, elimination of a market converts an external negotiation 
and hence a partially or wholly uncontrollable decision to a 
matter for purely internal decision. Nothing, we shall see, better 
explains modern industrial policy — capital supply is the extreme 
case — than the desire to make highly strategic cost factors subject 
to wholly internal decisions. Markets can also be controlled. This 
consists in reducing or eliminating the independence of action of 
those to whom the planning unit sells or from whom it buys.. . At 
the same time the outward form of the market, including the 
process of buying and selling, remains formally intact. 31 

At a time when "the largest 200 manufacturing enterprises had two 
thirds of all assets used in manufacturing and more than three fifths 
of all sales, employment and net income", 32 this represented a huge 
section of the US economy in which most economic operations were 
not subject to the immediate vagaries of the market. There was com- 
petition between the giants, but it was to a large extent undertaken 
by means different to the old competition to sell goods more cheaply 
than one another. The giant firms learnt that they could ward off po- 
tential competitors by resorting to non-productive methods — the 
use of their wealth to get a tight grip over distribution outlets; the 
use of advertising to hype up their own products, regardless of their 
intrinsic merits; the systematic cultivation of well greased contacts 
with buyers from governmental bodies. 

Galbraith thought this represented a fundamental change in the 
nature of capitalism itself. And Marxists who defined capitalism 
simply in terms of the "free market" competition between rival pri- 
vate capitalists could easily come to the same conclusion, since the 
huge area of production internal to the great corporations was not 
directly subject to the law of value. Extreme variations in the degree 
of "x-efficiency" — the internal efficiency of companies — showed 

The Long Boom 


how far many differed from the capitalist ideal. And capital did not 
automatically move under the impact of market forces out of sec- 
tors with big fixed investments, a high organic composition of 
capital and a low rate of profit, as a simplistic reading of Capital 
might suggest. Whether it did so or not depended on the decisions 
of managers who might decide to sacrifice short-term profitability 
for long-term growth within markets over which they already had 
a stranglehold. If the law of value continued to operate it was in the 
long term, since eventually corporations would not be able to grow 
and to keep rivals and newcomers to the industry at bay unless they 
continued to get enough surplus value to make massive new invest- 
ments. But often they would only discover whether they had done 
so once the long boom itself came to an abrupt end. 

The other advanced capitalisms 

The picture so far has been of the US economy in the post-war 
boom. It was responsible for approaching half of total world 
output at the end of the war, and its dynamic determined to a great 
extent what happened elsewhere. But the big European economies, 
with substantial but lower levels of arms spending, showed many 
of the same features. In Britain and to a lesser extent France, great 
investments in arms industries had the effect of drawing the rest of 
the economy forward, counteracting some of the pressures for the 
organic composition to rise and the rate of profit to fall, and per- 
mitting continual economic expansion — all without resort to 
Keynesian measures. 

In Germany armaments were less important. But the role of the 
government remained important. One Marxist account tells how: 

far more than in any other capitalist country the bourgeoisie in 
the Federal Republic made use of the state apparatuses and the 
monetary and fiscal system to force capital accumulation by 
means of favourable depreciation rates, credits for reconstruc- 
tion at favourable rates of interest and finance for investment. 
All this took place in contradiction to the official neoliberal eco- 
nomic theory... 33 

In Japan state capitalism advanced further in its influence over 
civilian industry than almost anywhere else in the Western 


Capitalism in the 20th Century 

world — despite a low level of direct state ownership. The state and 
the largest private firms worked together to ensure that that por- 
tion of the national income that had gone into arms before 1945 
now went into productive investment: 

The motive force for rapid growth was fixed investment in plant 
and equipment. Private fixed investment grew from 7.8 percent 
of GNP in 1946 to 21.9 percent in 1961. 34 

When imported raw materials were in short supply in the late 
1940s and the 1950s the government took charge of their alloca- 
tion to industries it thought would best contribute to the growth 
of the economy, to the building up of key industries like coal 
mining, iron and steel and the expansion of exports. 

The Ministry of International Trade and Industry (MITI) issued 
"guidelines" to industry which it ignored at its peril. The giant 
firms that had accepted the dictates of the war economy before 
August 1945 as essential to military expansion now accepted the 
dictates of MITI as essential to peaceful economic expansion: 

Japanese entrepreneurs are vigorous in investing. They will not 
confine their fixed investment within the limit of gross profits or 
internal accumulation, unlike the case of entrepreneurs in other 
advanced countries. Even if the fixed investment is over and 
above their gross profits, the enterprise will undertake invest- 
ment so long as bank finance is available. 35 

In other words, the heads of big business and the state worked to- 
gether to ensure the growth of Japanese national capitalism by 
mobilising the whole mass of surplus value and directing it to- 
wards "strategic" sectors, regardless of considerations of 
short-term profitability. What other state capitals did with military 
considerations uppermost, Japanese state capitalism did in the in- 
terests of overseas market competition. Exports played a very 
important role in driving the economy forwards. And that meant 
that Japanese growth was ultimately dependent on the US arms 
economy. As Robert Brenner shows in a highly empirical study: 

German and Japanese manufacturers derived much of their dy- 
namism by means of appropriating large segments of the 
fast-growing world market from the US and UK, while beginning 

The Long Boom 


to invade the US domestic market. This redistribution of market 
share — the filling of orders (demand) by German and Japanese 
manufacturers that had formerly been supplied by US produc- 
ers — gave a powerful boost to their investment and output. 36 

It was not "social compromise" and the "welfare state" that pro- 
duced the long boom and the "golden age". Rather they were all 
by-products of militarised state capitalism. Prosperity rested on 
the cone of the H-bomb. 37 

Labour power in the Great Boom 

Throughout the first post-war decades unemployment was at 
levels known previously only during brief boom periods. In the US 
unemployment was less than 3 percent in the early 1950s; in 
Britain it hovered between 1.5 and 2 percent; in West Germany a 
high level of unemployment caused by the economic dislocation of 
the early post-war years fell to 4 percent in 1957 and a mere 1 per- 
cent in 1960. 

So the problem for industrialised capitalist states was not coping 
with unemployment, but its opposite — ensuring that employment 
grew at sufficient speed to feed capital's seemingly insatiable ap- 
petite for labour power. The US employed workforce rose by 60 
percent between 1940 and 1970. Such expansion demanded com- 
pletely new supplies of labour power. Whether politicians and 
government administrators liked it or not, the state could not leave 
supplying the key raw material for economic or military competi- 
tion, labour, to the vagaries of a "free" labour market. The state 
had to supplement — and even partially supplant — the wages 
system with services and subsidies provided by itself on a much 
greater scale than previously. 

One answer to the shortage of labour power lay in reducing the 
agricultural workforce still more, with state-sponsored amalga- 
mations of small farms — an approach followed in much of 
Western Europe. Another lay in encouraging massive emigration 
of people from less developed countries to the cities of the indus- 
trial countries (from Turkey, Eastern and Southern Europe to 
Germany; from Yugoslavia, Portugal, Spain and Algeria to France; 
from the West Indies and the Indian subcontinent to Britain; from 
Puerto Rico to the US). A third solution — again adopted almost 


Capitalism in the 20th Century 

everywhere — was the drawing of married women into paid em- 
ployment. Yet each of the ways of enlarging the labour force 
created new problems for capital and the state. 

Squeezing labour from agriculture could work only if resources 
were put into agriculture in order to increase its productivity. This 
could be very expensive. But the alternative was that the provision 
of food for the growing urban population and raw materials for 
industry would suffer, creating working class discontent and bot- 
tlenecks in accumulation. And eventually there was little in the 
way of spare labour power left in the countryside to provide for 
the needs of industry as the peasantry shrank in numbers. 

Migration from the Third World was a very cheap way of getting 
labour power. The advanced country had to bear none of the costs 
of rearing and educating this part of its labour force — effectively, it 
was getting a subsidy from the immigrant workers' country of 
origin. 38 The new workforce was usually younger than the "native" 
workforce, and demanded less in the way of health care, old age 
pensions and so on. And its members were usually more prepared to 
tolerate low wages, harsh working conditions, rigid discipline and 
so on — in short, to be super-exploited. The pool from which this 
new labour came was potentially limitless. 

Yet there were practical limits. As migrant workers became ac- 
customed to living and working in their new home, they 
demanded conditions closer to those of established workers; they 
wanted decent accommodation and welfare benefits. The state had 
either to increase its expenditure on these things — or to see grow- 
ing social tensions that could lead to either intensified class 
struggles (to a considerable extent the revolt in France in 1968 was 
a revolt of such new workers) or to "racial" clashes between old 
established and newer workers. Unable to afford the social expen- 
diture needed to head off such sources of social instability — and 
eager to deflect discontent away from itself — the state usually re- 
acted by imposing controls on further immigration. 

The wholesale entry of married women into the workforce also 
demanded a certain level of investment by the state. Means had to 
be found to ensure that it did not lead to the neglect of child rear- 
ing — the socialisation of the next generation of workers — or a 
breakdown in the provision of food, shelter and clothing for the 
male workforce. Many of these means could be provided, at rela- 
tively low cost, with the application of new technology. The 
refrigerator, washing machine and vacuum cleaner, the replacement 

The Long Boom 


of the coal fire by electricity, gas or oil heating, the popularisation 
of frozen foods, the spread of fast food outlets, even the television 
set — all had the effect of reducing the amount of effort needed to 
ensure the reproduction of both present and future labour power. 
And they usually cost not a penny to the state or capital, being paid 
for by the family out of the enlarged income it received as the wife 
took up paid employment. Caring for young children while both 
their parents worked created greater difficulties, since the provision 
of nursery facilities could be costly for the state — even if these costs 
too could often be recouped from the wage of the working wife. 

So all the methods of expanding the labour force could work, 
up to a certain point — but beyond that they tended to imply quite 
considerable overhead costs. Welfare costs could be borne while 
the system was expanding rapidly. The "insurance" principle en- 
sured, as we saw in Chapter Five, that some sections of the 
working class paid for welfare provision to other sections. The 
extra cost amounted to only 2 or 3 percent of GNP in Western 
Europe, while in the US the state made a small surplus. 39 But the 
costs would become a burden once the Great Boom collapsed. 

There was another solution available to the labour shortage. 
But it was even more expensive. It was to increase state expendi- 
ture on the reproduction of the labour force, so as to increase the 
average level of skill. In all the advanced countries there was a con- 
siderable increase in educational expenditures during the Great 
Boom — particularly in the upper grades of secondary education 
and in higher education. 40 

Finally, there was a third area of expansion of state expendi- 
tures designed to increase productivity — expenditures designed to 
provide a feeling of security for employed workers. Into this cate- 
gory fell old age pensions and unemployment benefits. As James 
O'Connor noted, "The primary purpose is to create a sense of eco- 
nomic security within the ranks of employed workers and thereby 
raise morale and reinforce discipline". 41 Hence in many countries 
in the late 1960s wage-related unemployment benefits and redun- 
dancy payments were introduced. They were the other side of the 
"shake-out" of labour from older industries. 

This "socialisation" of labour costs had some important con- 
sequences for the system as a whole. Under conditions of acute 
labour shortage, the national capitalist state had to tend and care 
for labour power as well as exploit it if productivity was to 
match international levels. But this meant that workers had some 


Capitalism in the 20th Century 

possibilities of being able to sustain themselves without selling 
their labour power. There was a partial negation of the character 
of free labour — but only a partial negation, since the state ap- 
plied all sorts of pressures to keep people in the labour market. 

Yet even this limited "negation" of the free labour market was 
a burden that put up the overheads of each national capital. As 
such they exerted a downward pressure on the rate of return on 
the total national investment. For a long period this did not seem 
to matter. Other factors were at work protecting the rate of 
profit. But once the upward dynamic of the boom began to 
weaken, the costs of welfare became a crucial problem. The two 
functions — of increasing productivity and buying consent — were 
no longer complementary. Capital had to try to reduce the cost 
of maintaining and increasing productivity, even if doing so 
upset its old mechanisms for keeping control over the working 
class. This was to be an important factor shaping class struggle 
once the long boom faltered. 

The Eastern bloc 

The Western economies and Japan were not the only ones to 
achieve rapid growth rates during the post-war decades. So too did 
the USSR and the countries it dominated in Eastern Europe. Soviet 
electricity output grew by 500 percent between 1950 and 1966, 
steel output by just under 250 percent, oil output by 600 percent, 
tractor output by 200 percent, fabric output by 100 percent, shoe 
output by 100 percent, the housing stock by 100 percent. 42 By the 
mid-1970s the same consumer goods which had transformed 
people's lives in Western Europe and North America — the televi- 
sion set, the refrigerator, the washing machine — were also making 
their appearance in Soviet and East European homes, even if more 
slowly. 43 Since the collapse of the Eastern bloc in 1989-91 it has 
usually been forgotten that in the 1950s and 1960s even by many 
Western opponents of the USSR took it for granted that its growth 
rate was higher than regimes elsewhere in the world had achieved. 
A trenchant critic of the system, Alec Nove could write, "The suc- 
cess of the Soviet Union... in making itself the world's second 
industrial and military power is indisputable". 44 

But simply growing fast did not overcome the external pressures 
for more growth, since even after decades of industrialisation the 

The Long Boom 


Soviet economy was still less than half the size of its then main mil- 
itary competitor, the US. Indeed, in some ways the pressures grew 
greater. At the beginning of industrialisation, there were enormous 
reserves of labour that could be released for industry from agricul- 
ture. That meant it was not of any great concern to those at the top 
of the bureaucracy if much of this labour was used wastefully. It 
started to matter as the countryside began to empty of young 
men — leaving much of the agricultural production needed to feed 
the cities to be done by diminishing numbers of ageing people. The 
slave labour camps were run down soon after Stalin's death in 
1953, in part for political reasons but also to release inefficient 
slave labour for efficient exploitation as wage labour. It was an in- 
dication that the phase of "primitive accumulation" was at an end. 
There was recurrent talk within official circles from that time on- 
wards about economic "reform". During one such phase, in 1970, 
the leader Leonid Brezhnev spelt out the rationale: 

Comrade Brezhnev dwelt on the question of the economic com- 
petition between the two world systems. "This competition 
takes different forms," he said. "In many cases we are coping 
successfully with the task of overtaking and outdistancing the 
capitalist countries in the production of certain types of 
output... but the fundamental question is not only how much 
you produce but also at what cost, with what outlays of 
labour... It is in this field that the centre of gravity between the 
two systems lies in our time". 45 

This was the same logic of competitive accumulation that operated 
on the sometimes huge state sector of the Western industrial capi- 
talisms — or, for that matter, on the giant corporations described by 
Galbraith. The organisation of production inside the USSR might 
involve the putting together of different use values (so much 
labour, so many physically distinct raw materials, such and such a 
particular sort of machine) to produce further use values. But what 
mattered to the ruling bureaucracy was how these use values mea- 
sured up to the similar conglomerations of use values produced 
inside the great corporations of the West. And that meant com- 
paring the amounts of labour used in the USSR to the labour used 
in the Western corporations. Or, to put it in Marx's terms, pro- 
duction within the USSR was subject to the law of value operating 
on the global scale. 46 


Capitalism in the 20th Century 

One of the illusions created by the rapid non-stop growth of 
the USSR was that it proceeded smoothly and rationally ac- 
cording to the various Five Year Plans, in contrast with the ups 
and downs in the West. But the relentless drive to accumulate 
had as a necessary by-product disorganisation, chaos and waste 
in whole areas of production. At the beginning of every "plan" 
vast new industrial projects would begin to be constructed. But 
after a while it would become clear that they could not all be 
finished. Some (usually catering for people's consumption 
needs) would be "frozen", while the resources for them were di- 
verted elsewhere (to the production of means of production). 
This meant a continual chopping and changing of the goods re- 
sources were expected to produce; sudden pressure on people to 
produce more of one product and less of another; concealment 
by people at every level in the production process of the re- 
sources at their disposal in case they were suddenly pressed to 
produce more; massive amounts of waste as some of the things 
contained in the plans were produced, but not other things nec- 
essary for their use (such as the case in the 1980s when vast 
amounts of fertiliser were wasted because one of the frozen pro- 
jects was the building of the factory to provide the bags for 
packing the fertiliser). 47 

Since the collapse of the Soviet Union it has become habitual on 
both the left and the right to blame all this simply on bureaucratic 
irrationality, without acknowledging its similarity to the irrational- 
ity of the managerial despotism within Western enterprises — and 
the common roots of both in the subordination of human labour to 
competitive accumulation, that is, to the self-expansion of capital. 
Yet it was possible to trace each of the forms of irrationality within 
the Soviet economy back to overinvestment — just as it is with man- 
agerial irrationality within Western corporations. 

There was not only waste in the Soviet-type economies. There 
was also unevenness in growth over time, as in the West. Studies 
in the 1960s, mainly by Eastern European economists, revealed 
the presence of cyclical ups and downs in economies modelled 
on the USSR. The Czechoslovaks Josef Goldman and Karel 
Korba told in 1968 how: 

Analysis of the dynamics of industrial production in Czecho- 
slovakia, the German Democratic Republic and Hungary supplies 
an interesting picture. The rate of growth shows relatively regular 

The Long Boom 


fluctuations... These fluctuations are even more pronounced if 
analysis is confined to producer goods. 48 

The Yugoslav Branko Horvat was able to publish a book called 
Business Cycles in Yugoslavia* 9 which pointed out that even before 
the market reforms of 1968 the Yugoslav economy was "signifi- 
cantly more unstable" than ten other economies that were cited, 
"including the United States". A Western academic showed that 
such unevenness was already visible in the Soviet Union from the 
time of the first Five Year plan onwards. 50 

The pattern of unevenness showed great similarities with the 
Western capitalist states during the long boom. Its origin lay in 
the dynamics of competitive accumulation. As we saw in 
Chapter Three, at a certain point in any boom the competitive 
drive of capitalists to invest leads to a drying up of existing sup- 
plies of raw materials, labour and loanable capital (ie 
non-invested surplus value). The prices of all these things — com- 
modity prices, money wages and interest rates — begin to rise 
until the least profitable firms suddenly find they are operating 
at a loss. Some go out of business. Others survive, but only by 
abandoning planned investments and closing down factories. 
Their actions in turn destroy markets for other capitals, forcing 
them to abandon investments and close down factories. The 
"excess demand" of the boom gives rise to the overproduction of 
the slump. The secret of the Western long boom of the 1940s, 
1950s and 1960s lay in the way the national state could reduce 
the pressures leading to over-accumulation (by diverting a por- 
tion of capital into non-productive military channels); take direct 
action to try to maintain a high rate of exploitation (through 
wage controls); intervene to slow down the boom before it led 
key firms to become unprofitable; and maintain a minimum 
guaranteed level of demand through military orders. The state 
monopoly capitalist arms economy was not able to do away with 
the cyclical pattern of capitalist accumulation. Specifically, it 
could not stop competitive pressures causing capitalists to tend 
to expand production during upturns in the economy on a scale 
which exceeded the available resources. But it was able to pre- 
vent such spells of "over-accumulation" leading to slumps of the 
pre-Second World War sort. 

Something of the same pattern existed in the Soviet-type 
economies. Bottlenecks arose throughout the economy, threaten- 


Capitalism in the 20th Century 

ing the closure of vast sectors of production through shortages of 
inputs. Output never rose nearly as rapidly as planned. The mon- 
etary funds paid out by enterprises for materials and labour 
exceeded the output of the economy, giving rise to inflationary 
pressures which found direct expression as price rises or "hidden" 
expression as acute shortages of goods in the shops. 

Left to itself, over-rapid accumulation by certain key enter- 
prises would soon have absorbed the resources many enterprises 
depended on to keep operating at existing levels, leading to the 
wholesale closure of their plants and the destruction of the mar- 
kets for the output of other enterprises. It would have become a 
crisis of overproduction of commodities. But as in the West in 
the long boom, the state stepped in to try and pre-empt this by 
"cooling down" the economy. It ordered enterprises to "freeze" 
certain investments and to divert resources to others. This in- 
volved factories suddenly switching from one sort of output to 
another. The myth of the pre-planning of production gave way 
to the reality of after the event, "a posteriori", allocation, with a 
repeated shifting of inputs and outputs. One plan target which 
always suffered in the process was that for consumer goods pro- 
duction. The result was to increase still further the discrepancy 
between the funds laid out by enterprises on wages and the 
goods available for these wages to buy — to increase open or 
hidden inflation. 

Deep social and political crises in 1953 (East Germany), 1956 
(Poland and Hungary), 1968 (Czechoslovakia) and 1970-71 
(Poland again) showed how the tensions this produced could find 
sudden expression. But so long as it was possible to restore growth 
rates, the tensions could be reduced, usually by a combination of 
repression on the one hand and concessions over living standards 
on the other. Such remedies hid temporarily the underlying pres- 
sures towards crisis 

Those who failed to analyse the system in terms of competitive 
accumulation failed to see this. This was true of the Western pro- 
capitalist theorists of "totalitarianism". One can search their 
writings of the 1950s and 1960s in vain for some hints that 
Russian type systems contained inbuilt economic contradictions. 
It was also true of most of those who saw them as some sort of so- 
cialist or workers' states. They were continually over-optimistic 
about the economic prospects — in their own way mirroring the il- 
lusions of the Western Keynesians. 

The Long Boom 


Arms, profits and of the Cold War 

The arms budgets of the great powers were central to their eco- 
nomic development. But their roots were not narrowly economic. 
They flowed from a new struggle to divide and redivide the world 
between the main victors of the Second World War, the US and the 
USSR— the Cold War. 

The US had aspirations for its industries, the most advanced 
and productive in the world, to penetrate the whole world econ- 
omy through "free trade". The Western European powers, 
exhausted by the war, were in no position to challenge it directly 
(although British politicians often expressed a private desire to 
do so). Russia's rulers were in a different situation. The war's 
end left them dominating virtually the whole of northern 
Eurasia, from the borders of Western Europe right through to 
the Pacific. With levels of industrial productivity less than half 
those of the US, they were in no position to sustain themselves 
in economic competition through free trade. But they could con- 
test the US attempt at global hegemony by blocking its access to 
the economies under their control — not just the territory of the 
old Russian Empire, but also the countries of Eastern Europe 
which they subordinated to their military-industrial goals. The 
US, for its part, rushed to cement its hegemony over Western 
Europe through financing pro-American Christian Democrat 
and Social Democrat political parties, the Marshall Plan for re- 
viving European industry within parameters favourable to US 
interests, and the creation of the NATO military alliance and 
setting up US bases in Western Europe. 

The pattern was laid for the next 40 years, of each of the two 
great powers reaching out to draw as much of the world as possi- 
ble into its sphere of influence so as to gain a strategic advantage 
over the other. They fought a bloody war over control of the 
Korean peninsula, not because of the little wealth it then pos- 
sessed, but because of the strategic implications for the whole of 
the East Asian and Pacific region. Each tried over the following 
decades to extend its sphere of influence by giving aid and arms to 
states which fell out with its rival. 

The Cold War conflict could not be explained by economics 
as often understood, in terms simply of profit and loss account- 
ing. The armaments bills of both great powers soon exceeded 
anything their rulers could hope to gain from the increased 


Capitalism in the 20th Century 

exploitation of the lesser powers under their control. At no 
stage in the 1940s or 1950s did total US overseas investment (let 
alone the much smaller return on that investment) exceed US 
spending on arms. Even in the period of "disarmament" prior 
to the outbreak of the Korean War "military expenditure to- 
talled something like $15 billion a year. Thus it was 25 times as 
high as the sum of private capital exports". 51 By 1980 total ex- 
penditure on "defence" had risen to around $200 billion — less 
now than total overseas investment of $500 billion, but still 
substantially more than the profits that could possibly accrue 
from that investment. 

The picture for the USSR was somewhat similar. In the years 
1945-50 it pillaged Eastern Europe, removing plant and equip- 
ment wholesale from East Germany and Romania, and forced the 
region as a whole to accept prices below world market levels for 
goods going to the USSR proper. 52 But even in that period the eco- 
nomic gains from this must have been substantially less than the 
escalation of the USSR's arms budget once the Cold War had well 
and truly begun. And from 1955 onwards fear of rebellion in 
Eastern Europe led the Soviet government to relax the direct eco- 
nomic pressure on its satellites. 

The imperialism which necessitated arms spending was not that 
of a single empire in which a few "finance capitalists" at the centre 
made huge super-profits by holding billions of people down. 
Rather it was the imperialism of rival empires, in which the com- 
bined capitalists of each ruling class had to divert funds from 
productive investments to military expenditure in order to ensure 
that they hung on to what they already possessed. 

The calculation in both Washington and Moscow was simple. 
To relax the level of military spending was to risk losing strategic 
superiority to the rival imperialism, enabling it to extend its 
sphere of dominance. So the Russians lived in fear of an at- 
tempted US "rollback" of Eastern Europe, which would have 
broken these economies from the USSR's grasp, leading in turn 
to the possibility of an unravelling of the ties which bound the 
other constituent parts of the USSR to its Russian centre (some- 
thing that did in fact happen eventually with the great economic 
and political crisis that shook the whole Eastern bloc in the years 
1989 to 1991). At the same time, the US feared for its hegemony. 
As one US spokesman put it at the time of the Korean War, 
"Were either of the two critical areas on the borders of the 

The Long Boom 


Communist world to be overrun — Western Europe or Asia — the 
rest of the free world would be immensely weakened... in eco- 
nomic and military strength..." 53 

It was necessary, in other words, to turn vast amounts of value 
into means of destruction — not in order to obtain more value but 
to hold onto that already possessed. Such was the logic of capital- 
ist competition applied to the relations between states. So the Cold 
War amounted to a new inter-imperialist conflict of the sort de- 
scribed by Bukharin, and it soon overshadowed the old imperialist 
conflicts between the West European powers. 

Decolonisation and developmentalism in the Global South 

Eighty five percent of humanity lived outside the advanced indus- 
trial countries. Their experience of the "golden age" was very far 
from golden. The great majority still lived in the countryside, and 
there was little change in the poverty that plagued their daily lives. 

One important political change did, however, take place. The 
West European powers were forced, bit by bit, to abandon direct 
colonial rule, a process starting with a weakened Britain ending its 
190 year old empire in India in 1947 and ending with Portugal 
handing over power to liberation movements in Africa in 1975. 
The US replaced Western European influence in some regions. It 
took control of South Vietnam when the French withdrew in 
1954 — until it too was forced to withdraw after the most bitter of 
wars in the mid-1970s. It became the dominant influence in most 
of the Middle East and parts of Africa. But, like the European 
powers, it retreated from formal colonisation, granting indepen- 
dence to the Philippines and keeping direct control only over 
Puerto Rico. 

This retreat from direct colonisation had as a direct corollary 
the end of the old clashes between the Western powers over the 
partitioning of the rest of the world. The drive to war between 
them seemed to have gone once and for all. It was also accompa- 
nied, as we have seen, by something else unexpected by the classic 
theories of imperialism — losing their colonies did not stop Western 
economies participating in the long boom and conceding regular 
rises in living standards to their workers. And the advanced coun- 
tries without any colonies — West Germany, Japan and Italy — had 
the economies which expanded fastest of all. Meanwhile, for the 


Capitalism in the 20th Century 

first two post-war decades, exports of capital stayed down at the 
very low levels they had sunk to in the great slump of the 1930s. 
As Mike Kidron pointed out in 1962: 

Even in Britain... the significance of capital exports has declined 
tremendously: latterly they have run at about 2 percent of gross 
national product compared with 8 percent in the period before 
World War One; they now absorb less than 10 percent of sav- 
ings compared with some 50 percent before; and returns on 
foreign investment have been running at slightly over 2 percent 
of national income compared with. ..10 percent in 1914. 54 

The foreign investment that did take place was decreasingly di- 
rected towards the less industrialised parts of the world: "The 
concentration of activity is increasingly within the developed 
world, leaving all but a few developing countries outside the reach 
of the new dynamism". 55 

There was also a shift in the demand for Third World prod- 
ucts. Raw materials from agricultural countries had been 
indispensable for industrial production in the West before the 
First World War, and colonial control was an important way for 
industrialised countries to ensure their own supplies and block 
access to their rivals. But now there were synthetic substitutes for 
most raw materials — artificial fertilisers, synthetic rubber, rayon, 
nylon, plastics. A parallel transformation of agriculture in 
Western Europe and North America reduced food imports from 
the rest of the world. By the late 1950s withdrawal from colonies 
in Africa and Asia was no longer the threat it would once have 
been to the industrialists of the European countries. Companies 
which had made their fortunes from plantations and mines of the 
Global South began to diversify their investments into new lines 
of business. 

There was one great exception to this picture — oil. Here was the 
raw material of raw materials, the ingredient for manufacturing 
plastics, synthetic rubber and artificial fibres, as well as providing 
for massively expanding energy needs and propelling the ever 
greater proliferation of motor vehicles, tanks and aircraft. And the 
supplies of it were increasingly to be found outside Europe and 
North America. By the mid-1970s Saudi Arabia, Iraq, Iran, 
Kuwait, and the petty sheikhdoms around the Arabian Peninsula 
were the countries that mattered — as was shown by the temporary 

The Long Boom 


interruption of supplies during the Arab-Israeli war of 1973. It 
was not an accident that the one version of old style colonialism 
that continued to get untrammelled support from all the Western 
states was the settler state of Israel — fostered in its early years as a 
"Jewish homeland" by British imperialism, armed for its seizure of 
78 percent of Palestine in 1948 by the US and the USSR, allied 
with Britain and France in their attack on Egypt in 1956, and 
backed wholeheartedly by the US in the aggression that gave it 
control of the rest of Palestine in June 1967. 56 

Indigenous governments and capitalist development 

The dismantling of the European colonial empires was a fact of 
immense importance for something like half the world's people 
who had lived under their thumb. It also raised very important 
questions for those who had, in one way or another, fought against 
the hold of those empires. What happened to imperialism — and 
the fight against it — if empires no longer existed? 

The reaction of many social democrats and liberals in the West 
was to say that imperialism no longer existed. This was, for in- 
stance, the conclusion drawn by John Strachey. In End of Empire 
(1959) he argued that rising living standards meant businesses no 
longer needed colonies to absorb the surplus and prevent overpro- 
duction. In effect, he was saying that Hobson's alternative to 
imperialism, a reflation of the domestic economy, had prevailed 
and solved the system's problems. 

An important section of the left rejected such reasoning. They 
could see that the former colonial countries were still plagued by 
poverty and hunger — and that the Western firms that had bene- 
fited from empire remained entrenched in them. What is more, the 
end of the European empires was not the end to the violence in- 
flicted on the peoples of Third World, as the US state picked up the 
cudgel of the departing Europeans. 

Yet rejection of facile talk about an end to imperialism was 
often accompanied by quotes, parrot fashion, from Lenin's 1916 
analysis without recognising the changes that had occurred since 
it was written. His insistence that the great Western powers were 
driven to divide and redivide the world between them through 
direct colonial rule hardly fitted a situation in which colonies had 
gained independence. The response of most of the left was quietly 


Capitalism in the 20th Century 

to redefine imperialism to mean simply the exploitation of the 
Third World by Western capitalist classes, dropping the drive to- 
wards war between imperialist powers so central to Lenin's theory 
for what was in reality a version of Kautsky's ultra-imperialism. At 
the same time they simply replaced talk of colonialism with talk of 
"neo-colonies" or "semi-colonies". 

Lenin had written of "semi-colonies". For him these were places 
like China at the time of the First World War, where "indepen- 
dence" concealed continued political subordination to foreign 
armed forces in partial occupation of the country. There were 
some places where things did seem like this after the end of direct 
colonial control in the 1950s and 1960s. In many cases the de- 
parting colonial administrations were able to ensure that their 
place was taken by their own creatures, with enormous continuity 
in the personnel of the state, especially when it came to key posi- 
tions in the armed forces. So, for instance, France had granted 
"independence" to huge areas of West and Central Africa by 
handing power to people who continued, as in the past, to work 
with French companies, use the French currency — and periodically 
invite French troops in to maintain "order". 

But in some of the most important cases independence did mean 
independence. Governments proceeded not only to take seats in 
the United Nations and set up embassies all over the world. They 
also intervened in the economy, nationalising colonial companies, 
implementing land reforms, embarking on schemes of industriali- 
sation inspired by the preaching of theorists of economic 
development or often by Stalin's Russia. Such things were under- 
taken with varying degrees of success or failure in India, Egypt, 
Syria, Iraq, Algeria, Indonesia, Ghana, Equatorial Guinea, Angola 
and South Korea, as well as by the more radical regimes of China, 
Cuba and Vietnam. Over time even some of the "docile" ex-colo- 
nial regimes began to follow the same path. This was true, for 
instance, of the Malaysian regime, 57 of the Shah's regime in Iran in 
the 1960s and early 1970s, and of the Taiwanese regime. Even the 
dictator Mobutu, brought to power with the help of the CIA in 
Congo-Zaire in 1965, nationalised the mighty Union Miniere de 
Haut Katanga mining corporation along with 70 percent of export 
earnings three years later. 

To call regimes like Abdul Nasser's Egypt or Jawaharlal Nehru's 
India "neo-colonial" or "semi-colonial" was a travesty — as it was 
with "populist" regimes in Latin America or the Fianna Fail gov- 

The Long Boom 


ernments in Ireland. Attempts were made in each case to establish 
not only independent political entities, but also independent cen- 
tres of capital accumulation. These still operated within a world 
dominated by the much stronger capitalisms of the advanced 
countries, but they were by no means mere playthings of them. 

A new "developmentalist" orthodoxy pointed the means by 
which such economies were meant to close the gap with the ad- 
vanced industrial nations. It held that capitalist market 
mechanisms could not achieve that goal. As the staff of the World 
Bank later recalled of "the dominant paradigm at that time": 

It was assumed that in the early stages of development markets 
could not be relied upon, and that the state would be able to 
direct the development process... The success of state planning 
in achieving industrialisation in the Soviet Union (for so it was 
perceived) greatly influenced policy makers. The major devel- 
opment institutions (including the World Bank) supported these 
views with various degrees of enthusiasm. 58 

Just as Keynesianism was dominant within bourgeois economics 
in the advanced countries at the time, so statist, "import substitu- 
tionist", doctrines were hegemonic when it came to the Third 
World. The main proponent of these in the 1940s and 1950s was 
the very influential United Nations Economic Commission for 
Latin America, directed by the Argentinian economist Raoul 
Prebisch. It argued that development could only take place if the 
state intervened to block imports to foster the growth of new local 
industries, 59 since otherwise "dependence" on the advanced capi- 
talist economies would prevent industrialisation." 60 

More radical versions of such "dependency theory" dominated 
much of the left worldwide in the 1960s. The writings of Paul 
Baran (especially The Political Economy of Growth) and Andre 
Gunder Frank (who talked of the "the development of underde- 
velopment") 61 dominated most Marxist thinking on the subject 
(even though Gunder Frank did not see himself as Marxist). 62 

Baran wrote that: 

Far from serving as an engine of economic expansion, of tech- 
nological progress and social change, the capitalist order in 
these countries has represented a framework for economic stag- 
nation, for archaic technology and for social backwardness. 63 


Capitalism in the 20th Century 


The establishment of a socialist planned economy is the essen- 
tial, indeed indispensable, condition for the attainment of 
economic and social progress in underdeveloped countries. 64 

Gunder Frank was just as adamant: 

No country which has been tied to the metropolis as a satellite 
through incorporation in the world capitalist system has 
achieved the rank of an economically developed country except 
by finally abandoning the capitalist system. 65 

"Socialism" for Baran and "breaking with capitalism" for Gunder 
Frank meant following the model of Stalinist Russia. 66 

The "dependency" argument, whether in its mainstream or radi- 
cal form, was a weak one. It assumed that capitalists from the 
advanced countries who invested in the Third World would deliber- 
ately choose not to build up industry even when it would have been 
profitable. This did not fit the facts. There was considerable foreign 
finance of industrial development in Tsarist Russia, Argentina and 
the British dominions before the First World War. Nor did Western 
states at all times use their power to prevent industrialisation. 
Sometimes they did and sometimes they did not. Finally, a ruling 
class of one country which depends on bigger capitalist countries for 
much of its trade and investment does not completely lose its ability 
to forge an independent path of capital accumulation. The 
European economies, for instance, have long been to a high degree 
dependent on what happens in the US economy without the 
European ruling classes simply becoming American puppets. 

So pervasive was the view that "capitalism means underdevel- 
opment" that people read it back into some of the Marxist 
classics. Baran quoted Lenin to back up his case, while even some- 
one as perceptive as Nigel Harris could ascribe such views to "the 
Bolsheviks in 1917". 67 

Lenin's writings on imperialism had in fact put forward a com- 
pletely different view, as did Leon Trotsky's writings of the late 
1920s. Lenin wrote that the export of capital "accelerates the devel- 
opment of capitalism in the countries to which it is exported", 68 while 
Trotsky wrote that capitalism "equalises the cultural and economic 
development of the most advanced and most backward countries" , 69 

The Long Boom 


even if as it did so "developing some parts of the world economy 
while hampering and throwing back the development of others". 70 

What mainstream dependency theory did do for a period was 
provide an ideological justification for methods which enabled the 
rulers of some politically independent states to achieve impressive 
levels of accumulation, even if only for a period. Argentina's rate 
of economic growth through the 1950s and 1960s was compara- 
ble with that of Italy 71 and by the early 1970s a third of its 
workforce was in industry, with only 13 percent on the land. 72 
Brazil's 9 percent growth rate was one of the highest in the world 73 
and by the mid-1980s the Economist could refer to Sao Paulo as 
"a Detroit in the making". 74 South Korea experienced rapid eco- 
nomic growth of about 8 percent a year after a general, Park 
Chung Hee, seized power in 1961 and forced the big firms (or 
chaebols) to work within a framework established by the state and 
embarked on state capitalist industrialisation. 

China, where state control of the economy came closest to the 
Russian model endorsed by the radical dependency theorists, had 
an economic growth rate no higher than these figures once it had 
completed the first short stage of economic recovery from 20 years 
of civil war and Japanese invasion. The imposition of plans which 
diverted resources towards new heavy industries — steel, cement, 
electricity — in a very poor, overwhelmingly agricultural country 
like the China of the early 1950s meant squeezing the living stan- 
dards of the mass of the population. What the peasants had gained 
through land reform in the previous decade, they now lost through 
rigorously enforced taxation of their output. Then came the ulti- 
mately disastrous attempt at collectivisation through so-called 
People's Communes, in an attempt to bring about a "Great Leap 
Forward" in economic development. The leap cut total agricul- 
tural output, led to famine in vast areas of the countryside and had 
to be abandoned. Much of the new industry was far from efficient. 
The growth of heavy industry out of all proportion to what was 
happening in the rest of the economy led to acute shortages of 
inputs needed to keep plants running, and to the production of 
other goods which had no immediate use. There were massive 
swings between spells of fast industrial expansion and spells of 
near stagnation, and many of the grandiose new giant plants were 
only able to work at a fraction of their capacity. 

There was usually growth even in countries that were not as 
successful as Brazil and South Korea. The manufacturing output 


Capitalism in the 20th Century 

in India grew by 5.3 percent a year from 1950 to 1981, and agri- 
cultural output by 2.3 percent, even if there was continual 
disappointment at the economy's inability to exceed a "Hindu" 
growth rate of 4 percent. Sub-Saharan Africa had "per capita 
growth rates of around 2 percent in the early 1960s" which "rose 
to nearly 5 percent by the end of that decade". 75 Egypt, whose 
leader Abdul Nasser nationalised almost all of industry, grew 
about 6 percent per year through the first half of the 1960s. Such 
outcomes in terms of levels of economic growth were enough to 
convince one "revisionist" Marxist, Bill Warren, to come to the 
conclusion in the early 1970s that most of the rest of the left were 
wrong. Countries in the Third World could catch up with the West 
without breaking with capitalism: 

The prospects for successful capitalist economic development 
(implying industrialisation) of a significant number of major 
underdeveloped countries are quite good... Substantial 
progress in capitalist industrialisation has already been 
achieved... In so far as there are obstacles to this development, 
they originate not in current imperialist-Third World relation- 
ships, but almost entirely from the internal contradictions of 
the Third World itself... The imperialist countries' policies 
and their overall impact on the Third World actually favour 
its industrialisation... 76 

He provided figures showing the real per capita economic growth 
that was in fact happening. In challenging the assumption of the 
radical version of dependency theory he was on strong ground. So 
too was he when he made the point that if the left saw its main pri- 
ority as supporting industrialising regimes as "anti-imperialist" it 
could "find itself directly supporting bourgeois regimes which, as 
in Peru and Egypt, exploit and oppress workers and peasants 
while employing anti-imperialist rhetoric". 77 

But lacking from his analysis was any real accounting for the 
enormous unevenness between Third World countries, even 
though his own figures showed that per capita annual growth in 
two of the most populous countries, India and Indonesia, was only 
1.2 percent and 1 percent (compared to 6.8 percent for South 
Korea, 4.9 percent for Thailand and 7.1 percent for Zambia). He 
also failed to see that rapid capitalist development was not neces- 
sarily smooth and uninterrupted through time: 

The Long Boom 


Private investment in the Third World is increasingly creating 
the conditions for the disappearance of imperialism as a system 
of economic inequality between nations of the capitalist world 
system, and... there are no limits, in principle, to this process. 78 

This led him to make a prediction that would soon be put to the 
test — and proved dramatically wrong: 

As for future prospects, the World Bank's view is that the ma- 
jority of countries in the 1970s will, as in the 1960s, remain free 
of debt servicing problems... The first three years of the 1970s 
strongly suggest that this will be the case. 79 

Warren had taken the crude account by Gunder Frank and Baran 
that had maintained development was an impossibility of and 
simply turned it upside down. Lacking was any sense of the 
chaotic, unpredictable character of economic growth for the 
weaker sections of the world system that Trotsky insisted on when 
recognising that capitalism does not always lead to stagnation: 

By drawing countries economically closer to one another and 
levelling out their stages of development, capitalism operates by 
methods of its own, that is to say, by anarchistic methods which 
constantly undermine its own work, set one country against an- 
other, one branch of industry against another, developing some 
parts of the world economy while hampering and throwing back 
the development of others... Imperialism... attains this "goal" by 
such antagonistic methods, such tiger leaps and such raids upon 
backward countries and areas that the unification and levelling 
of world economy which it has effected is upset by it even more 
violently and convulsively than in the preceding epoch. 80 

It was a truth that would affect the lives of many hundreds of mil- 
lions of people over the next four decades. 

In the Global South, as in the West, Japan and the Eastern bloc, 
variants of what Lenin and Bukharin had called "state capitalism" 
did permit a long period of economic growth. But those who ex- 
trapolated from that to see a smooth, crisis-free future were soon 
to be proved wrong. 


Capitalism in the 20th Century 


The End of the Golden Age 

The crisis of Keynesianism 

"The National Bureau of Economic Research has worked itself 
out of one of its first jobs, namely business cycles." So proclaimed 
Paul Samuelson in 1970. Less than three years later the crisis 
which was supposed now to be impossible broke upon the 
world — or at least upon the advanced capitalist countries and a 
big part of the Third World. The "golden age" had come to a 
sudden end. 

The reaction of governments everywhere was to try to keep it 
going by resorting to the Keynesian methods they had come to be- 
lieve infallible. Government budget deficits, rare in the previous 
three decades, now became the norm. They failed to restore the 
system to its previous health. Not only was there the first lapse 
into negative growth — a real recession as opposed to the "growth 
recessions" sometimes known previously — with soaring levels of 
unemployment, but it was accompanied by rising levels of infla- 
tion, which in a country like Britain could approach 25 percent. 

There were attempts to explain what happened as a result of the 
impact of the sudden very big increase in the price of oil in 
October 1973 due to the brief "Yom Kippur" war between Israel 
and the Arab states and the accompanying embargo on oil exports 
by Saudi Arabia. But the effect of the price increase was only to 
reduce the national incomes of the advanced countries by about 
one percent — and most of the money that accrued to the oil pro- 
ducers ended up being recycled back to the advanced countries via 
the international banking system. It was hardly enough in itself to 
explain the scale of the impact on most of the world system — an 
impact which Keynesian methods should have been sufficient to 
deal with according to the then conventional economic wisdom. 
What is more, the oil price increase did not take place in isolation 


from other developments. Already three years earlier a "growth 
recession" had hit all the major economies simultaneously in a 
way which had not happened in the previous quarter century, and 
had been followed by a very sharp economic upturn and acceler- 
ating inflation even before the oil price rise. 1 In short, the recession 
that began at the end of 1973 was the culmination of precisely the 
sort of economic cycle that Keynesian-style state interventions had 
supposedly consigned to the history books. 

Mainstream Keynesians were at a loss. They found that their 
theory no longer did any of the things they had claimed for it. As 
one Keynesian, Francis Cripps of the Cambridge Economic Policy 
Review, later put it, they suddenly realised that: 

Nobody really understands how the modern economy works. 
Nobody really knows why we had so much growth in the post- 
war world... how the various mechanisms slotted together. 2 

Many Keynesians dropped their former ideas overnight and en- 
dorsed the "monetarist" theories propagated by Milton Friedman 
and the Chicago School of economists. These held that the at- 
tempts by governments to control economic behaviour had been 
misconceived. There was, they argued, a "natural non-inflationary 
rate" of unemployment, and attempts to reduce it by government 
spending were bound to fail and to merely cause inflation. All 
states should do, they insisted, was to control the supply of money 
so that it grew at the same speed as "the real economy" — and take 
such action as was necessary to break down "unnatural monopo- 
lies" by trade unions or nationalised industries, while holding 
down unemployment benefits so that workers would then be per- 
suaded to accept jobs at lower wages. 

The reply of apologists for capitalism to its critics for 30 years 
had been that it could be made to work with state intervention. 
Now it was that it could only be made to work if state interven- 
tion was scrapped. As the dissident radical Keynesian Joan 
Robinson summed up the mainstream shift: 

The spokesmen of capitalism were saying: Sorry chaps, we 
made a mistake, we were not offering full employment, but the 
natural level of unemployment. Of course, they suggested that a 
little unemployment would be enough to keep prices stable. But 
now we know that even a lot will not do so. 3 


Capitalism in the 20th Century 

Labour's prime minister James Callaghan virtually admitted this 
when he told his party's conference in September 1976: 

We used to think you could just spend your way out of reces- 
sion by cutting taxes and boosting government borrowing. I tell 
you in all candour that that option no longer exists; and insofar 
as it ever did exist, it worked by injecting inflation into the econ- 
omy. And each time that has happened, the average level of 
unemployment has risen. 

The point was repeated 20 years later by the future Labour prime 
minister, Gordon Brown: 

Countries which attempt to run national go it alone macro- 
economic policies based on tax, spend, borrow policies to 
boost demand, without looking to the ability of the supply 
side of the economy, are bound these days to be punished by 
the markets in the form of stiflingly high interest rates and 
collapsing currencies. 4 

Politicians and academics who had been brought up on 
Keynesianism came to accept the same parameters for deciding 
economic policy as their old opponents, with no alternative to 
high levels of unemployment, welfare cuts, "flexibility" to make 
workers "more competitive" and laws to restrain "trade union 
power". Keynesians who did not drop their old beliefs were 
pushed to the margins of the economic establishment. By 2007 a 
study showed that "72 percent of economic students" were at ed- 
ucational institutions without a single "heterodox economist" 
who challenged "the neoclassical and neoliberal assumptions". 5 

But the rush towards monetarism by supporters of the system 
was not any more able to come to terms with the crisis than 
Keynesianism. Monetarism was, after all, little more than a regur- 
gitation of the neoclassical school which had dominated bourgeois 
economics until the 1930s. Just as it had been incapable of ex- 
plaining the unprecedented severity of the inter-war slump, it was 
incapable of explaining the crisis of the 1970s and 1980s, still less 
of dealing with it. In Britain the monetarist Howe budget of 1979 
was followed by a doubling of both inflation 6 and unemployment, 
and left industrial output in 1984 15 percent below its level of 11 
years before. 7 The monetarist measures did not even manage to 

The End of the Golden Age 


control the money supply; its broadest measures (what economists 
call M3) grew in 1982 by 14.5 percent instead of the intended 6 to 
10 percent. 8 The policy merely served to destroy much of local in- 
dustry, exacerbate the crisis of the early 1980s and lay the ground 
for another crisis in 1990. 

Some economists who had abandoned Keynesianism for mone- 
tarism in the mid-1970s could be seen deserting monetarism in its 
turn in the early 1980s. Financial Times columnist Samuel Brittan, 
who had done much to popularise monetarist ideas in Britain, was 
by 1982 criticising many monetarist policies and calling himself a 
"new-style Keynesian". In the United States, Reagan's economic 
advisers, faced with the failure of monetarist policies to end a 
severe slump, quietly ditched monetarism 9 and abandoned one of 
monetarism's central principles — the balanced budget. 

But much mainstream economic theory moved in a different 
direction. A "new classical" school gained influence that con- 
tended, very much along the lines of Hayek in the 1930s, that 
what was wrong with monetarism was that it left a role for the 
state — intervening in money markets. Friedman, they claimed, 
had fallen into the same trap as Keynes by urging government 
moves to shift the money supply: he was, in a certain sense, "a 
Keynesian". 10 Such moves, they insisted, could not alter business 
behaviour in the hoped for way, since the "rational expectations" 
of entrepreneurs would always lead them to discount government 
intervention in advance. Fiddling with the money supply, like 
government deficit spending, stopped supply and demand inter- 
acting with each other properly. "Booms and slumps", it was 
claimed, "are the outcome of fraudulent Central Reserve bank- 
ing". 11 It is an amazing commentary on the remoteness of most 
academic economics from any contact with reality that the new 
classicals could maintain intellectual credibility when they denied 
the instability and irrationality of the laissez faire economy in a 
period which saw three major international recessions. 

The high point of these ideas was with a shortlived boom in the 
mid to late 1980s. It seemed to vindicate their optimism about the 
benefits to economic growth of deregulation, privatisation and the 
removal of all restraints on the greed of the rich. But they lost 
some of their lustre with the renewed deep recession of the early 
1990s. A different school of free market economists gained some 
support within the mainstream. This was the variant of the 
"Austrian school" influenced by the ideas of Joseph Schumpeter, 


Capitalism in the 20th Century 

which saw the slump-boom cycle as inevitable — and a good thing. 
The system, it argued, was capable of non-stop expansion, but 
only on the basis of "creative destruction" which destroyed old 
forms of production to clear the way for new ones. 12 But it was no 
more able than the mainstream Keynesians, the monetarists and 
the new classicals to answer a central question: Why was the 
system plagued once again by recurrent crises and by a long term 
decline in average growth rates after three decades of unprece- 
dented, almost crisis-free growth? 13 

It was the failure of the anti-Keynesians to come to terms with 
such problems that led some Keynesians — and some on the far left 
influenced by Keynesianism — to blame them for the demise of the 
"golden age". It was not the system as such, they argue, that was 
behind the recurrent crises. But, as Notermans has pointed out: 

If neither the recovery from the Great Depression or post-war 
growth can be attributed to Keynesian policies... [it] cannot serve 
as an explanation for the termination of full employment. 14 

So where does the explanation lie? 
Where the crises came from 

Missing from all the most influential mainstream explanations 
for the end of the "golden age" was what was happening to the 
rate of profit. Yet various efforts at measuring it have come to a 
single conclusion: it fell sharply between the late 1960s and the 
early 1980s. 

The results are not always fully compatible with each other, 
since there are different ways of measuring investment in fixed 
capital, and the information on profits provided by companies and 
governments are subject to enormous distortions. 15 Nevertheless, 
economists Fred Moseley, Thomas Michl, 16 Anwar Shaikh and 
Ertugrul Ahmet Tonak, 17 Gerard Dumenil and Dominique Levy, 
Ufuk Tutan and Al Campbell, 18 Robert Brenner, Edwin N Wolff, 19 
and Piruz Alemi and Duncan K Foley 20 have all come to very simi- 
lar conclusions. A certain pattern emerges, which is shown in 
graphs given by Dumenil and Levy (Figure 1) for the whole busi- 
ness sector in the US and by Brenner (Figure 2) for manufacturing 
in the US, Germany and Japan. 

The End of the Golden Age 


Figure 1: US profit rates accounting for ( — ) and abstracting from (--) the 
impact of financial relations 11 





4 J 


i \ v /\ / 
j s I \J 

Including finance 
Abstracting from finance 






Figure 2: US, German and Japanese manufacturing net profits rates 2 







West Germany 1950-90 and Germany 1991-2000 

There is general agreement that profit rates fell from the late 1960s 
until the early 1980s. There is also agreement that they partially 
recovered from about 1982 on, but with interruptions at the end 
of the 1980s and the end of the 1990s, and never making up more 
than about half the decline since the long boom. According to 
Wolff, the rate of profit fell by 5.4 percent from 1966 to 1979 and 
then "rebounded" by 3.6 percent from 1979 to 1997; Fred 
Moseley calculates that it "recovered... only about 40 percent of 
the earlier decline"; 23 Dumenil and Levy that "the profit rate in 


Capitalism in the 20th Century 

1997" was "still only half of its value of 1948, and between 60 
and 75 percent of its average value for the decade 1956-65". 24 

There were attempts to explain the decline in profitability in the 
1970s as resulting from a wave of workers' struggle internation- 
ally which had supposedly forced up the workers' share of total 
income and cut into the share going to capital. That argument was 
put forward by Andrew Glyn and Bob Sutcliffe, 25 by Bob 
Rowthorne 26 and accepted in part by Ernest Mandel. 27 Glyn's 
analysis has been given a favourable mention much more recently 
by Martin Wolf. 28 But statistical analysis at the time suggested 
there had been no increase in the share of wages when tax, capital 
depreciation and various other factors were taken into account. 29 
The argument also failed to explain why all the Western 
economies moved into crisis at the same point in the mid-1970s. 
In Italy, Britain, Spain and France there were important improve- 
ments in the level of working class organisation in the late 1960s 
and early 1970s. But there was no similar improvement in Japan 
and West Germany, while in the US "there was a sharp decline in 
real wages of non-agricultural workers from late 1972 to spring 
1975, while productivity on the whole increased". 30 

What did seem to make sense — and still does — was Marx's argu- 
ment about the organic composition of capital. A mainstream study 
of the US economy showed a rapid growth in the ratio of capital in- 
vestment to workers employed in manufacturing by over 40 percent 
between 1957-68 and 1968-73. 31 One study of the UK showed a rise 
in the capital-output ratio of 50 percent between 1960 and the mid- 
1970s. 32 Samuel Brittan noted with bewilderment: 

There has been an underlying long term decline in the amount 
of output per unit of capital in manufacturing... This is a fairly 
general experience in the industrial countries... One can con- 
struct a fairly plausible story for any one country, but not for 
the industrial world as a whole. 33 

The more recent calculations of Michl, 34 Moseley, Shaikh and 
Tonak and Wolff 35 have all concluded that the rising ratio of capi- 
tal to labour was an element in reducing profit rates. It is a 
conclusion that validates Marx's position that a rising ratio of cap- 
ital to labour can cut into profits — and is an empirical refutation 
of the position held by Okishio and others that this is impossible. 
But it still leaves open why this happened then and not earlier. 

The End of the Golden Age 


It is an issue that can be resolved by looking at contradictions 
within the long boom already being highlighted in the early 1960s 
by those who explained the boom in terms of the massive level of 
arms expenditures. 

Arms spending was very unevenly distributed among the most 
important economies. They consumed a very high proportion of 
the national output of the US and the USSR in the 1950s (up to 13 
percent in the first case, probably 20 percent or more in the second 
case), a lower proportion in Britain and France, and a much 
smaller proportion for Germany and Japan. This did not matter 
unduly in the first years after the Second World War, when there 
was a relatively low level of foreign trade and most firms were sub- 
ject to low levels of international economic competition. The 
taxation to pay for the US arms budget cut into the profits of 
American firms, for instance, but this did not greatly disadvantage 
any one such firm in its domestic competition with another. And 
there was little for capitalists to complain about so long as the 
overall rate of profit did not decline much from its high level in the 
immediate post war period. The positive effects of arms spending 
more than compensated for the negative effects. 

But over time the unevenness did come to matter. The US, as 
part of its programme to use its dominant economic position to 
cement its hegemony outside the Russian bloc, allowed access to 
its markets to the West European states and Japan. But economies 
with low levels of arms expenditure could invest proportionately 
more and achieve faster growth rates than the US could. Over time 
they began to catch up with its levels of productivity and to in- 
crease their relative importance in the world economy. 

Capital growth in Japan over the period 1961-1971 was 11.8 
percent per year, while in West Germany over 1950-62 it was 9.5 
percent; these compared with figures for the US for 1948-69 of 
only 3.5 percent. 36 Japan accounted for 17.7 percent of the com- 
bined advanced countries' GNP in 1977 and West Germany 13.2 
percent; in 1953 the figures had only been 3.6 and 6.5 percent re- 
spectively. Meanwhile, the US share had fallen to 48 from 69 
percent. 37 The shift was explained by the benefits Japan and 
Germany gained from the high level of worldwide arms expendi- 
ture, especially by the United States, without having to sacrifice 
their own productive investment to pay for it. Had all countries 
had comparable levels of productive investment to that of the West 
Germans and Japanese there would have been a very rapidly rising 


Capitalism in the 20th Century 

global organic composition of capital and a downward trend in 
the rate of profit. As it was, capital had grown in Japan "much 
more rapidly than the labour force — at more than 9 percent a year, 
or more than twice the average rate for the Western industrialised 
countries..." 38 Non-military state capitalisms could only expand 
without crises because they operated within a world system con- 
taining a very large military state capitalism. 

So the Japanese and German experiences did not contradict the 
thesis of arms expenditure as an explanation of world growth and 
stability. But they were a contradictory factor in this growth. Their 
very success meant that a growing chunk of the world economy 
was not wasting investible output on arms. Nor was that the end 
of the matter. The very success of the low arms spending 
economies began to put pressure on the high arms spenders to 
switch resources away from arms and towards productive invest- 
ment. For only then could they begin to meet the challenge they 
faced in market competition from Japan and West Germany. 

This was most clearly the case for Britain. Its economy was 
highly dependent on foreign trade and it ran into balance of pay- 
ments crises with every spell of rapid economic growth between the 
late 1940s and the late 1970s. Successive British governments were 
forced, reluctantly, to abandon their notions of imperial grandeur 
and to reduce the proportion of the national product going on de- 
fence — from 7.7 percent of GDP in 1955 to 4.9 percent in 1970. 

In the case of the US, the pressure was less obvious at first, since 
even in 1965 foreign trade only amounted to about 10 percent of 
GNP and the country enjoyed a trade surplus throughout the 
1950s and 1960s. Nevertheless, arms spending declined from 
around 13 percent of GNP during the Korean War to between 7 
and 9 percent in the early 1960s. The pressure of arms spending 
on its international competitiveness was suddenly revealed when 
it shot up by a third with the Vietnam War. The new level was not 
anything like that of the Korean War. But it was too much for a US 
industry facing vigorous competition for markets. There was an 
upsurge of inflation at home and Wall Street turned against the 
war. 39 Then, in 1971 for the first time since the Second World War, 
US imports exceeded US exports. President Nixon was forced into 
two measures which further undermined the stability of the world 
economy: he cut US arms spending 40 and he devalued the US 
dollar, in the process destroying the "Bretton Woods" system of 
fixed international currency exchange rates that had acted as a 

The End of the Golden Age 


framework for the expansion of world trade throughout the post- 
war period. 

The dynamic of market competition was relentlessly undercut- 
ting the dynamic of military competition. What some people called 
the "crisis of hegemony" 41 of the system in the 1970s was, in fact, 
the offspring of something else — the inherent instability of a world 
of state capitalisms engaged in two quite different dimensions of 
competition, economic and military, with each other. 

One of the paradoxes of capitalism, we saw in Chapter Three, is 
that, although a rising organic composition of capital reduces av- 
erage profit rates, it raises the profits of the first capitalist to 
introduce new machinery. So the Japanese and West Germans, by 
engaging in capital intensive forms of investment, cut world profit 
rates, while raising their own national share of world profits. 42 
Their increased competitiveness in export markets forced other 
capitalisms to pay, with falling rates of profit, for the increased 
Japanese and German organic compositions of capital. But this, in 
turn, put pressure on these other capitalists to increase their com- 
petitiveness by raising their own organic compositions. The falling 
profit rates of the 1970s were the result. By 1973 the rates were so 
low that the upsurge in raw material and food prices caused by the 
boom of the previous two years was sufficient to push the ad- 
vanced Western economies into recession. 

Suddenly there was no guarantee for the major capitalist con- 
cerns that new investments on the scale they needed to keep up 
with international competition would be profitable. Investment 
began to fall sharply and firms tried to protect their profits by cut- 
ting back on employment and labour costs. Declining markets 
then led to further falls in profits and investment. 

The old pattern of boom turning into slump had returned after 
its 30-year break. When governments reacted by trying to boost 
demand with budgetary deficits, firms did not immediately re- 
spond, as the mainstream Keynesians held that they should, by 
increasing investment and output. Instead they increased prices to 
try to recoup their profits, to which workers who still had a degree 
of confidence from long years of full employment responded by 
fighting for wage increases. Governments and central banks were 
then faced with a choice. They could allow the money supply to 
expand so as to allow firms to further raise prices and protect prof- 
its. Or they could try to restrict the money supply with high 
short-term interest rates, relying on firms then being forced to 


Capitalism in the 20th Century 

resist workers' demands. Typically they turned from the first ap- 
proach in the mid-1970s to the second in the late 1970s. But the 
success in restoring investment and creating a new period of 
growth did not last long even when governments had succeeded in 
subduing working class resistance. The rate of profit could not be 
raised above the pre-crisis level of 1973, and in 1980-82 a second 
"oil shock" was sufficient to push the world into a second serious 
recession, proving that monetarism could no more restore condi- 
tions to those of the long boom than could Keynesianism. 

The limits of state directed capitalism 

Capitalism was coming up against the limits of the state capitalist 
strategy for maintaining accumulation. That strategy had worked 
so long as states were able to ignore the immediate effects on the 
rate of profit of directing some of the mass of investible surplus 
value into areas that were not immediately particularly profitable 
(the Japanese prioritising growth over profitability) or into waste 
production (the arms economy). But this depended, firstly, on the 
rate of profit not dropping too sharply, and, secondly, on being 
able to ignore how the competitiveness of the production of par- 
ticular goods within the national economy compared to that 
taking place elsewhere in the world system (or, in Marx's language, 
to ignore the law of value on a world scale compared with pro- 
duction within the individual units of the national economy). By 
the mid-1970s both preconditions had been undermined by the 
contradictory development of the long boom itself. 

The rate of profit had now fallen to a degree which made un- 
productive expenditures or not particularly profitable areas of 
investment an increasing burden on further accumulation. And the 
very dynamism of the long boom had produced a growing inter- 
connectedness between national economies. By 1979 US foreign 
trade amounted to 31 percent of output, as against 10 percent in 
1965. 43 A much larger proportion of industry than before had to 
worry about the international comparisons of its costs. Whole in- 
dustries suddenly found that the value of their output had to be 
recalculated on the basis of what it would cost to produce it with 
the more advanced techniques and lower labour costs of other 
countries — and that meant it was not high enough to provide "ad- 
equate" profits. 

The End of the Golden Age 


This seems to explain the well known stagnation of labour pro- 
ductivity in the US in the 1970s — the value of the machinery on 
which labour worked was originally reckoned in terms of how 
much it cost to produce or replace inside the US, but with rising 
international trade, what mattered was the lower figure that 
would have been obtained if world comparisons were used. 44 

In any case, the feature described by Galbraith, of firms being 
able to downplay the importance of profit in the interests of 
growth, was undermined. And this was not only a very significant 
change for the state monopoly capitalism of the US. It was to have 
devastating consequences for those countries which had gone 
much further in the direction of full blooded state capitalism in the 
Eastern bloc and the Third World. They too were to enter into a 
new period of crises. 

The end of the Stalinist model 

The assumption of conventional thinking on the right as well as 
the left was that the Soviet-type economies displayed a very differ- 
ent dynamic to that of the West. It was assumed, with very little 
dissent 45 until the 1970s and sometimes the 1980s, that they could 
sustain high levels of growth indefinitely, even if they were also 
marked by major inefficiencies and tended to produce low quality 
goods. Typical of the attitude on the left, even from people who 
were scathing about the denial of workers' rights in such societies, 
was the position Ernest Mandel held. He wrote in 1956: 

The Soviet Union maintains a more or less even rhythm of eco- 
nomic growth, plan after plan, decade after decade, without 
the progress of the past weighing on the possibilities of the 
future... All the laws of development of the capitalist economy 
which provoke a slowdown in the speed of economic growth 
are eliminated... 46 

Mandel still argued in the mid-70s, that "while the recession is hit- 
ting all the capitalist economies, the countries with non-capitalist 
economies are escaping the overall effects of the recession". 47 

Such attitudes received a rude shock in the late 1980s when 
Mikhail Gorbachev, recently appointed as general secretary of the 
Communist Party of the USSR, revealed that the economy had 


Capitalism in the 20th Century 

been suffering from "stagnation" for some years. 48 His economic 
advisor, Abel Aganbegyan, said: 

In the period 1981-85 there was practically no economic 
growth. Unprecedented stagnation and crisis occurred during 
the period 1979-82, when production of 40 percent of all in- 
dustrial goods actually fell. 49 

The official figures for the Soviet-type economies had already in 
the late 1960s shown a long-term tendency for their growth rates 
to decline, by between a third and two thirds. 50 The long-term de- 
cline in growth rates was paralleled by — and dependent 
on — something else. The output/capital ratio kept falling — from 
2.4 in 1951-5, to 1.6 in 1956-60 and 1.3 in 1961-65. Or, to put it 
another way, the amount of constant capital required to produce a 
certain amount of new output kept rising. 

The problem was made worse because growing gross output in 
material terms was not good enough for the ruling bureaucracies. 
Their concern was with how this material output compared with 
that produced by their international rivals — that is with the value 
of the output in international terms. This led to recurrent attempts 
by sections of the bureaucracy to implement economic reforms, 
amid complaints about productivity and the quality of what was 
produced: in the early 1950s after Stalin's death, in the early 1960s 
under Nikita Khrushchev and then in the late 1960s under Leonid 
Brezhnev and his prime minister, Alexei Kosygin. 

The reforms had only limited effects. A rise in workers' living 
standards, in contrast to the very sharp fall in the 1930s, encour- 
aged greater commitment by the workforce and a rise in 
productivity. But the pressures of competitive international accu- 
mulation (military in the case of the USSR, market as well as 
military in the case of the East European states) led to a repeated 
tendency of increased consumer goods and food output to be sac- 
rificed to the needs of industrial investment. As Soviet statisticians 
explained in 1969, "Owing to the international situation it has not 
been possible to allocate as many resources as intended to agricul- 
tural investment". 51 Such a switching of resources from one sort of 
production to another necessarily led to increasing waste, under- 
mined the morale of the workforce, and led people at every level of 
managerial hierarchies to hide the resources at their disposal so as 
to enable them to cope if inputs were suddenly curtailed. 52 

The End of the Golden Age 


It is necessary to note in passing that such a phenomenon was 
not unique to the Soviet-style economies. Exactly the same pres- 
sures apply to those below the top managerial ranks in Western 
corporations as they are expected to be able to respond to 
sudden changes in the pressures on them from above in response 
to changing competition. Under such conditions, the firms' costs 
of production can depart very widely from those which ought to 
be achieved. The result can be what one economist has called "x- 
inefficiency" — a level of inefficiency in the company amounting 
to 30 or 40 percent of production costs. 53 Production costs and 
the prices which would prevail in a "perfect market" depart mas- 
sively from each other — to use Marxist terminology, there are 
massive short-term infringements of the law of value. 

Such things are rarely studied by mainstream economists be- 
cause both their micro- and macro-economics deal with what 
happens between firms, not within them. But there are repeated 
references to such problems in managerial studies. Interestingly, 
some Western studies concluded when it came to relationships be- 
tween enterprises in the USSR "allocative efficiency" (that is, for 
Marxists, the law of value) did apply: "Inter-firm trade in factors 
of production may be as efficient as in market economies". 54 

What produced crisis and waste inside Western enterprises and 
Soviet-style economies alike was the drive to accumulate at all 
costs. It meant, as we saw in Chapter Seven, investment expand- 
ing repeatedly at the expense of consumption, increased 
imbalances in the economy, a continual cyclical pattern to growth 
and increased alienation of the workforce. Figures given by the 
Russian economic journalist Vasily Selyunin in 1987 showed the 
increasing subordination of consumption to accumulation over 
nearly six decades, with only 25 percent of output going to con- 
sumption in 1985 as compared to 39 percent in 1940 and 60.5 
percent in 1928. He concluded, "The economy is working more 
and more for itself, rather than for man". 55 

His words echoed (probably unintentionally) those of Marx 
describing the logic of capitalism as "accumulation for accumu- 
lation's sake, production for production's sake". 56 But the drive 
to such accumulation was not only an expression of the alien- 
ation of the capitalist system for Marx. It was also the force 
ultimately behind the outbreak of crises. For it meant that accu- 
mulation reached a point at which it attempted to proceed faster 
than the extraction of the extra surplus value necessary to make 


Capitalism in the 20th Century 

it possible. At such a point new accumulation could only proceed 
at the expense of existing accumulation, as Grossman spelt out in 
his theory of "capitalist breakdown". There was "over-accumula- 
tion of capital". The only response open to capitalists in this 
situation was to shut down the plant, sack some workers and try 
to restore profits at the expense of the wages of the others. Each of 
these moves had the effect of making it impossible for some of the 
already produced commodities to be sold (or, in Marx's words, for 
the "realisation of surplus value" to take place), creating a general 
overproduction of goods in relation to the market. 

The Soviet Union had always experienced cyclical downturns as 
a result of attempts to accumulate too rapidly, as we saw in the 
previous chapter. But as with the major Western capitalisms in the 
long boom, the downturns had not turned into economic contrac- 
tion, a "real recession." Now these became more difficult to avoid 
as the slowdown in growth had its impact. 

Poland and the foretaste of a dire future 

Two young Polish Marxists, Jacek Kuron and Karol Modzelewski, 
produced a pathbreaking study of the economic contradictions in 
an Eastern bloc country in 1964. They pointed to the findings of 
certain East European economists about the way over-accumula- 
tion affected the rest of the economy. Accumulation came up 
against three "barriers". The "inflation barrier" signified that too 
rapid expansion of investment had led either to normal inflation (as 
the state printed money to pay for it, so raising prices and cutting 
living standards) or to "hidden inflation" (as cutbacks in the supply 
of goods to the shops led to shortages, queues and a growing black 
market.) The "raw material barrier" signified that there were just 
not enough inputs for production to reach the projected level. The 
"export barrier" meant that attempts to make up for the shortages 
of inputs by importing from abroad led to foreign exchange crises. 
Kuron and Modzelewksi concluded that a point was soon going to 
be reached in which the internal reserves would no longer exist for 
accumulation to continue without creating an immense social 
crisis. They argued against those who looked to reform: 

What we have here is not a contradiction between the objectives 
of the plan and the anti-stimuli resulting from faulty directives, 

The End of the Golden Age 


but a contradiction between the class goal of the ruling bureau- 
cracy (production for production) and the interests of basic 
groups who achieve the production (maximum consumption). 
In other words, it is a contradiction between the class goal of 
production and consumption, and it results from existing con- 
ditions, not from mismanagement. 57 

Their analysis was partially vindicated in 1970 when attempts to 
resolve a crisis caused by over-investment at the expense of living 
standards led to workers occupying the country's Baltic shipyards, 
attacks on them by the police and the enforced resignation of the 
country's leader, Gomulka. But at first it seemed that the new lead- 
ership had found a way out of the crisis, with a new boom based 
on massively expanding trade with the West and borrowing from 
Western banks which permitted imports to rise by 50 percent in 
1972 and 89 percent in 1973. 

Polish state capitalism was overcoming the limits to accumula- 
tion created by the narrowness of its national economy by 
integration into the world economy through market competition. 
The other side of this, however, was that the Polish economy was 
bound to suffer whenever the world economy went into recession. 
And dependency on the rest of the world system for inputs to pro- 
duction and for export earnings prevented the state shifting 
resources from one sector of the economy to another so as to ward 
off any incipient internal recession turning into an actual one. From 

1980 to 1982 there developed "a crisis unprecedented in the history 
of Europe since the second world war". 58 The "national net mater- 
ial product" fell by nearly a third; prices increased by 24 percent in 

1981 and 100 percent in 1982; and real wages fell by about a fifth. 59 
The regime attempted to place the burden of the crisis on the 

mass of workers — and produced a sudden upsurge of resistance 
through the Solidarnosc workers' movement. The events served as a 
warning to the whole of the Russian bloc. Soviet-style state capital- 
ism was not immune to a crisis similar in important ways to that 
then hitting Western state monopoly capitalism. Both had their 
roots in the system of competitive accumulation as a whole. 60 
Catastrophic crisis was inevitable at some point in the not too dis- 
tant future throughout the Soviet bloc — including in the USSR itself: 

By 1981, the choice between maintaining the closed economy 
and opening up to the rest of the world was indeed the choice 


Capitalism in the 20th Century 

between the frying pan and the fire. The first option meant deep- 
ening stagnation, growing waste, an inability to satisfy the 
demands of the mass of the population, and the continual danger 
of working class rebellion. The second option meant binding 
oneself into the rhythm of a world economy increasingly prone 
to stagnation and recession — and giving up the administrative 
means to stop recession involving contraction of the domestic 
economy. That is why the Polish crisis of 1980-81 was so trau- 
matic for all the rulers of Eastern Europe. It proved there was no 
easy solution to the problems besetting every state. 61 

The Soviet crash 

The Soviet bureaucracy was not long in discovering this the hard 
way. Its levels of accumulation were reaching the limits of what 
could be sustained. It depended more on foreign trade than previ- 
ously, using oil revenues to buy wheat abroad to feed the 
population in the 1970s and early 1980s (adding to worldwide in- 
flationary pressures). A fall in the world price of oil in the course 
of the mid-1980s then threw its domestic economic calculations 
into some disarray. And the decision of the Reagan administration 
to reassert US hegemony by raising arms spending put pressure on 
the USSR to do likewise. The external factors added to the internal 
problems caused by trying to sustain accumulation in the face of 
declining growth rates. 

Gorbachev's promotion to head of the ruling Communist Party 
was a sign that influential people had recognised the urgency of the 
situation — his rise owed much to Yuri Andropov, who had wit- 
nessed what crisis could lead to as ambassador to Hungary in 
1956 and as general secretary of CPSU during the Polish events of 
1980-81. Gorbachev has been blamed since as a "counter-revolu- 
tionary" by some people on the left nostalgic for the Soviet style 
set-up. But his intention was to try to save that set-up through top- 
down reforms before economic, social and political crisis on Polish 
lines could arise. His misfortune was that the crisis had reached a 
point where it could not be overcome by reform. 

Reports from ministerial meetings in the winter of 1988-9 pro- 
vide a picture of increasing economic chaos, with the regime not 
seeing any way to deal with it. There were bitter clashes over "the 
balance (or rather the imbalance) between different sectors of the 

The End of the Golden Age 


economy", the "number of enterprises" which were "significantly 
refusing to supply planned output" or were "significantly reduc- 
ing deliveries" and the way "the volume of new investment 
continued to grow". 62 "The supply of goods to the consumer 
market" had "suddenly begun to deteriorate sharply and notice- 
ably before our eyes in the second half of 1987 and especially in 
1988". 63 There was an: 

increasingly strained situation as regards satisfying the public 
money-backed demand for goods and services... The problem 
of supplying the population with food has worsened... The 
money supply has reached critical dimensions... Everything in 
the economy is in short supply. 64 

By October 1989 there was open talk of "the crisis in many parts 
of the economy, the shortages, the unbalanced market, the collapse 
of old relations before new ones are put in place, an atmosphere 
of uncertain prospects and scarcities". 65 Prices were rising, since 
factories and shops found they could reduce production and 
simply raise prices, disrupting supplies for the rest of the economy. 

The economic crisis, as in Poland, turned into a political and 
social crisis. Gorbachev had intended to permit a limited opening 
("glasnost") of discussion in the ruling party and the media to iso- 
late those in the bureaucracy opposed to his reforms. But people 
increasingly took advantage of this to give expression to old griev- 
ances and their discontent with the deteriorating economic situation. 
An unprecedented series of mass demonstrations and riots took 
place in the non-Russian national Soviet republics of Armenia, 
Kazakhstan, the Baltic states, Georgia, the Ukraine, Byelorussia and 
Azerbaijan, fusing struggles for national rights with grievances at 
the social conditions people experienced. So the protests by the 
Armenian minority in the Karabakh region of Azerbaijan "began as 
protests against catastrophic mismanagement and miserable eco- 
nomic conditions". 66 The newspaper Pravda said that in 1986 (even 
before the crisis deepened) there was 27.6 percent unemployment in 
Azerbaijan and 18 percent in Armenia. 67 In Kazakhstan "only half 
the young people had a chance to find a job in 1981-85". 68 The head 
of the state-run unions said that across the USSR as a whole 43 mil- 
lion people were living below the poverty line. 69 Estimates of the 
total number of unemployed varied from 3 percent to 6.2 percent 
(8.4 million people). Then miners right across the USSR struck in 


Capitalism in the 20th Century 

the early summer of 1989 and soon after Abalkin complained, "A 
wave of strikes has engulfed the economy". 70 This was happening as 
huge mass movements in Eastern Europe — partly in response to 
their economic crises — were breaking Soviet control on the region 
and deepening the general sense of political crisis, encouraging fur- 
ther protests in the USSR's non-Russian republics and weakening 
the capacity of the central state to impose its will. 

Those running the enterprises did not know how to cope with 
the wave of protests from below apart from making concessions 
which raised money wages, and they had even less of an idea about 
what do about the shortages of inputs needed to maintain the level 
of production. Stagnation gave way to economic contraction — the 
beginnings of a slump — in the second half of 1989. 

There were calls from economists who claimed that only greater 
competition between enterprises, and eventually direct competition 
between firms inside Russia and those elsewhere in the world econ- 
omy could force managers to be efficient and to produce the things 
that were needed. But they had no more idea than the ministries at 
the centre as how to find the resources to complete the investments 
that were meant to provide the outputs that would restore balance 
to the economy. The economic collapse continued regardless of 
what the government did, leading to ever greater discontent and 
political upheaval. An attempt by Gorbachev to take a hard line to 
restore central control in the spring of 1991 produced a new wave 
of discontent which forced him to retreat. A coup against him by 
those who hankered after a return to the past in August 1991 fell 
apart, lacking support from the most important generals. There 
was no popular constituency for trying to return to the old order. 
But those who preached reform did not have a way forward either, 
despite the brief popularity for "100-day" or "300-day" pro- 
grammes promising miraculous economic recovery. 

Such programmes were Utopian in the extreme. The collapse of 
central control left the giant Soviet enterprises in a monopolistic or 
semi-monopolistic position. They were able to dictate to the market 
and to produce what they wanted rather than what was needed by 
the economy as a whole; they were in a position to raise prices and 
to simply ignore contractual obligations to other enterprises. There 
was no stopping the combination of deepening recession, inflation 
and acute shortages of consumer goods and food. Economists, 
planners and frightened bureaucrats began to look for any scheme 
to get them out of the mess, until finally they gave up attempting to 

The End of the Golden Age 


control what was happening. When Yeltsin and the Communist 
leaders of the other national republics announced the dissolution of 
the USSR into its component republics at the end of 1991 they were 
only giving political expression to the economic fragmentation that 
was already under way, with the heads of each industrial sector 
trying to protect themselves from the general economic crisis by re- 
lying on their own resources. This was turned into a supposed 
economic strategy through "shock therapy" policies of Yeltsin's 
"liberal" ministers and Western advisers like Jeffrey Sachs. The as- 
sumption was that, left to compete with each other without 
restraints from the state, enterprises would soon be pricing goods 
rationally in a way that would lead the efficient ones to establish 
links with each other, and that this would restore stability. In fact, 
all it did was to provide governmental blessing to a slump already 
under way whose only precedent anywhere in the 20th century was 
that of 1929-33 in the US and Germany. 

The failure of economic reform was not just a failure of imple- 
mentation. There was a flaw in the very notion of reform itself. 
The aim was to restructure the Soviet economy so that those sec- 
tions of it capable of adjusting to the current international level of 
the forces of production would expand while others closed down. 
But this was bound to be an enormously painful undertaking, not 
just for those workers who suffered in the process but for the mass 
of the individual members of the bureaucracy as well. 
Restructuring the British economy between the mid-1970s and the 
mid-1980s had involved shutting down about one factory in three 
and destroying capital on such a scale that gross industrial invest- 
ment in 1990 was still no higher than in 1972. It is very doubtful 
that it could have proceeded smoothly if British capitalism had not 
had the lucky bonus of enormous North Sea oil revenues. The 
USSR's economy was much larger than Britain, and its enterprises 
had been much more insulated from the rest of the world for 60 
years. The proportion that was to be destroyed by an immediate 
opening to international competition was correspondingly greater. 
This, in turn, did considerable damage to the remaining competi- 
tive enterprises as they lost suppliers of materials and components 
on the one hand and buyers for their output on the other. 

The roots of the crisis lay in the pressure to accumulate for the 
sake of accumulation that arose from the bureaucracy's position as 
part of a competitive world system. The Soviet economy had 
reached the point at which the precondition for a further wave of 


Capitalism in the 20th Century 

self-expansion of capital was a crisis involving the destruction of at 
least some past accumulation. The only difference between Russia 
and, say, France or Britain, was that the destruction was to be on a 
considerably greater scale. And this was because the Soviet Union 
had undergone six decades of accumulation without restructuring 
through crises and bankruptcies, while for the British and French 
economies it was only four and three decades respectively. 

Few people were prepared to see things in these terms at the 
time. The vast majority of those who had struggled for democratic 
reform in Russia believed that the turn to market capitalism would 
open up a glorious future. What they got instead was a devastating 
slump, the corruption of the Yeltsin years and the domination of 
the economy and society by former members of the ruling bureau- 
cracy and mafiosi reborn as private capitalist oligarchs. 
Meanwhile, in the rest of the world the great majority of politi- 
cians and theorists in the social democratic and former Stalinist 
left drew the conclusion that it was socialism that had failed and 
that the future lay with Western style markets, failing to perceive 
the depths of the crises brewing there too. 

Japan: the sun that stopped rising 

The world's second economic power at the beginning of the 1980s 
was the USSR. Japan took its place as the Soviet crisis of the late 
1980s turned into collapse. 71 Japan's average growth rate through- 
out the 1980s was 4.2 percent as against 2.7 percent for the US 
and 1.9 percent for West Germany. Its annual investment in man- 
ufacturing equipment was more than twice that of the US. 72 That 
the future lay with Japan was the near universal conclusion of 
media commentators. A committee of the US Congress warned in 
1992 that Japan could overtake the US by the end of the decade. 
"After Japan" became the slogan of European and North 
American industrialists trying to motivate their workforces to 
greater feats of productivity. The "threat" from the "rising sun" 
became the excuse for the job losses experienced by American auto 
workers. Keynesian commentators like Will Hutton and William 
Keegan wrote books extolling the Japanese model of capitalism. 

Then in 1992-3 a financial crisis pushed Japan into its own 
"period of stagnation", with a growth rate averaging just 0.9 per- 
cent a year between 1990 and 2001. 73 By 2007 its economy was 

The End of the Golden Age 


only a third of the size of the US's (and the European Union's) 74 as 
against estimates as high as 60 percent in 1992. 75 

The blame for what happened is usually ascribed to faults in the 
running of its financial system — either due to financial markets not 
being "free" enough in the 1980s, or to inappropriate action by 
the central banks once the crisis had started. The conclusion from 
such reasoning is that the Japan crisis was unique and has little to 
tell us about the direction in which the global system is going. The 
sudden inability of the world's second biggest economy to grow 
then becomes the result of accidents. 

Yet all the elements of the Marxist account of the crisis of the 
inter-war years are to be found in the Japanese case. Japan had a 
rapidly rising ratio of capital to workers from the 1950s to the late 
1980s. This grew in the 1980s by 4.9 percent a year — more than 
four times as fast as in the US and 70 percent faster than in 
Germany. 76 The result, as Marx would have predicted, was down- 
ward pressure on the rate of profit. It fell by about three quarters 
between the end of the 1960s and the end of the 1980s. 

Japanese profit rate 77 

Manufacturing Non-financial corporate 

1960-69 36.2 25.4 

1970-79 24.5 20.5 

1980-90 24.9 16.7 

1991-2000 14.5 10.8 

Return on gross non-residential stock 79 
1960 28.3 
1970 18.0 
1980 7.8 
1990 3.9 

The decline seemed manageable until the end of the 1980s. The 
state and the banks worked with private industry to sustain growth 
without much attention to profit rates. So long as there was a mass 
of profit available for further investment, the Japanese system en- 
sured that it was used. Japan had been hit hard by the global 
recession of the mid-1970s, but was able not only to recover from 
it before most other countries but also to restructure industry in 
such a way as to keep expanding throughout the early 1980s when 
the US and Europe were in recession: 


Capitalism in the 20th Century 

The crisis [of 1973-5] indicated that future growth on the basis 
of heavy and chemical industrialisation was untenable. The role 
of the state in changing the strategic direction of Japanese capi- 
talism was fundamental. Administrative guidance by MITI 
[Ministry of International Trade and Industry — CH] began to 
nudge Japanese capital in the direction of electronics, automo- 
biles, capital equipment and semiconductors... 79 

This required high levels of investment. The United States, for ex- 
ample, invested just 21 percent of its GDP during the 1980s 
compared with a Japanese figure of 3 1 percent. According to one es- 
timate, the ratio of capital stock to GNP in Japan was nearly 50 
percent higher than in the US. 80 The concentration of investment 
into certain industries in this way raised their productivity, even 
though it remained fairly low in the rest of the Japanese economy. 81 
But such high investment could only be sustained by holding down 
the consumption of the mass of people. Partly this was done by 
keeping down real wages; partly it was done through providing min- 
imal state provision for sickness and pensions, forcing people to 
save. As Rod Stevens pointed out when the boom was at its height: 

Real wages in Japan are still at most only about 60 percent of 
real wages in the US, and Japanese workers have to save mas- 
sively to cope with the huge proportion of their lifetime 
earnings which is absorbed by such things as housing, educa- 
tion, old age and health care. 82 

But this level of real wages restricted the domestic market for the 
new goods Japanese industry was turning out at an ever increas- 
ing speed. The only way to sell them was to rely on exports. As 
Stevens also pointed out: 

Because of capital's increasingly strict wage control and author- 
ity in the workplace, growing labour productivity in the 
consumer goods branches of the machinery industries (eg motor 
cars and audio-visual equipment) had to find outlets in export 
markets if the Japanese working class's limited buying power 
was not to interrupt accumulation. 83 

High productivity in the select range of prioritised industry made the 
required level of exports possible, with Japanese cars and electronics 

The End of the Golden Age 


increasingly penetrating the US market. But it brought complica- 
tions in its wake. Japanese economic success was very dependent on 
US good will. When the US demanded that Japan accept an upward 
revaluation of its currency to make its goods less competitive against 
American goods, Japanese capitalism had little choice but to comply 
and the volume of exports suffered (even though revaluation meant 
their value in dollar terms did not). 

The reaction of the state to this was to provide cheap funds to 
keep industrial investment and expansion going. As Karel van 
Wolferen has said, "To compensate the corporate sector for the 
squeeze of the exchange rate, the Ministry [of Finance] encouraged 
the banks vastly to increase their lending". 84 But there had been a 
weakening of the old mechanisms which directed bank lending into 
industrial development — caused in part by the growing integration 
of Japanese capitalism into the world system. 85 The expanded bank 
lending found its way into speculation on a massive scale: 

The explosion of liquidity helped set off an upward spiral of 
real-estate values, long used as collateral by the big companies, 
which then justified inflated stock values. 86 

In what was later called the "bubble economy", property values 
soared and the stock exchange doubled in value — until the net 
worth of Japanese companies was said to be greater than that of 
the US companies, although by any real measure the US economy 
was about twice the size of the Japanese one. But while the bubble 
lasted the Japanese economy continued to grow — and even after 
the bubble had started deflating, bank lending enabled the econ- 
omy to keep expanding throughout 1991-2 as recession hit the US 
and Western Europe. Then it became clear that the banks them- 
selves were in trouble. They had made loans for land and share 
purchases that could not be repaid now these things had collapsed 
in price. The banking system was hit by recurrent crises right 
through the 1990s, writing off a total of around 71 trillion yen 
(over $500 billion) in bad loans. The total sum owed by businesses 
in trouble or actually bankrupt were set at 80 to 100 trillion yen 
($600 to $750 billion) by the US government, and at 111 trillion 
yen (nearly $840 billion) by the IMF. 87 

The role of the financial system in producing the bubble and then 
the long drawn out banking crisis has led most commentators to 
locate the origin of the Japanese crisis in faults within that system. 


Capitalism in the 20th Century 

The problem, neoliberal commentators claim, was that the close 
ties between those running the state, the banking system and in- 
dustry meant that there was not the scrutiny about what the banks 
were up to which a truly competitive economy would have pro- 
vided. 88 It was this which enabled such a massive amount of dodgy 
lending to take place. As an explanation, it fails because very simi- 
lar bubbles have happened in economies like the US which 
supposedly fulfil all the norms of "competitiveness". It is difficult 
to see any fundamental difference between the Japanese bubble of 
the late 1980s and the US housing bubble of the mid-2000s. 

The neoliberal reasoning that blames the crisis on the state be- 
lieves there was a solution — the state should simply have walked 
away and allowed some of the big banks to go out of business. But 
this assumes that some banks going bust would not bring down 
other banks to which they owed money, leading to a cumulative 
collapse of the whole banking sector. No advanced industrial state 
dare even contemplate that happening. Whenever it has seemed 
possible, other states have behaved in general as the Japanese 

In any case, there is no reason to believe that the banking crisis 
was the ultimate cause of Japanese stagnation. The neoclassical 
economists Fumio Hayashi and Edward C Prescott have argued 
that firms that wanted to invest could still do so, since "other 
sources of funds replaced bank loans to finance the robust invest- 
ment by nonfinancial corporations in the 1990s". 89 But they have 
had to recognise that "those projects that are funded are on aver- 
age receiving a low rate of return". 90 In fact, there was a fall in 
productive investment, although not anything like a complete col- 
lapse. In such a situation, restructuring the banking system, 
whether through allowing the crisis to deepen, as the neoliberals 
wanted, or gradually as those of a more Keynesian persuasion sug- 
gested, would not solve the crisis. On this American economist 
Paul Krugman rightly made the point: 

The striking thing about discussion of structural reform, how- 
ever, is that when one poses the question, "How will this 
increase demand?" the answers are actually quite vague. I at 
least am far from sure that the kinds of structural reform being 
urged on Japan will increase demand at all, and see no reason 
to believe that even radical reform would be enough to jolt the 
economy out of its current trap. 91 

The End of the Golden Age 


The reason was that the trap lay outside the banking system, in the 
capitalist system as a whole. The rate of profit had fallen to a point 
in the late 1980s which precluded further substantial increases in 
workers' living standards. But that in turn prevented the domestic 
economy from being able to absorb all of the increased output. A 
new massive round of accumulation could have absorbed it, but 
for that profitability would have had to have been much higher 
than it was. Richard Koo's study of the crisis, The Holy Grail of 
Macroeconomics, by stressing the hidden debts of major corpora- 
tions, hints at what had really gone wrong, but fails to ground the 
problem of insolvency in the long-term decline of profitability. 92 

The Japanese state did turn to some Keynesian type solutions, 
with a big programme of public works construction (bridges, air- 
ports, roads, etc). Gavan McCormack writes, "With the onset of 
chronic recession after the bubble burst at the beginning of the 
1990s, the government turned to ever larger — and decreasingly ef- 
fective — Keynesian deficits", and that "Japan's public works 
sector has grown to be three times the size of that of Britain, the 
US or Germany, employing 7 million people, or 10 percent of the 
workforce, and spending between 40 and 50 trillion yen a year — 
around $350 billion, 8 percent of GDP or two to three times that 
of other industrial countries". 93 According to one estimate the 
state's share of output increased from an average of 13.7 percent in 
the 1984-1990 period to 15.2 percent in the 1994-2000 period. 94 

But it was not enough to fill the gap created by the limited stimu- 
lus to investment from the rate of profit, as the graph below shows. 




Gross domestic investment *" 




Gross investment 

Government purchases 

1984 1986 1988 1990 1992 1994 1996 1998 2000 

(Source: Fumio Hayashi and Edward C. Prescott, "The 1990s in Japan: A 
Lost Decade") 


Capitalism in the 20th Century 

The economy did not collapse in the 1990s in the way that the US 
and German economies did in the early 1930s. The state still 
seemed able to stop that. But it could not lift the economy back to 
its old growth path. Sections of Japanese capital believed they 
could escape from this trap by investing abroad — as the gap be- 
tween Gross Investment and Gross Domestic Investment shows. 
But it was not an answer for the great bulk of Japanese capital 
which did its utmost to try to raise the rate of profit through rais- 
ing the rate of exploitation, even though it could only reduce 
domestic demand still further and deepen its problems. Nor was it 
an answer for the Japanese working class, which whether it liked it 
or not would be compelled to struggle if it was to avoid life getting 
worse. Economic growth did not rise from the doldrums until the 
mid-2000s, when Chinese imports of machinery gave a boost to 
Japanese industry — but this was to prove to be very shortlived. 

Japan's crisis was not as devastating to the lives of its people as 
that which broke out a couple of years earlier in the USSR. Yet, un- 
noticed by nearly all economists, mainstream and Marxist alike, 
there was a similarity between them. Capital accumulation had 
reached the point where it could no longer extract a surplus from 
those it exploited on a sufficiently rising scale to keep abreast of the 
internationally competitive level of accumulation it looked to. The 
barrier to capital accumulation had indeed become capital itself. 
Those who presided over accumulation had two choices. They 
could allow their bit of the system to restructure itself through blind 
competition, taking on trust ideological claims that it would pro- 
duce new miracles. Or they could play safe, knowing they might 
never get out of long-term stagnation. The rulers of Russia chose 
the first path and saw their economy, already halved with the loss of 
the rest of the USSR, halve in size again. Japan's rulers took the 
other path, and their economy went through a decade and a half of 
debilitating stagnation without seeming any closer to a solution to 
its problems at the end than it was at the beginning. The big ques- 
tion both raised was, how would other countries, particularly the 
US, react if they fell into the same stagnation trap? 

The impact on the Global South 

The collapse of the two state-oriented ideological models, 
Keynesianism and Stalinism, had a profound effect on political 

The End of the Golden Age 


forces aspiring after the "development" of Third World economies 
into full and equal components of the world system. It pushed 
them to look for new models of capital accumulation in place of 
the state-directed import-substitutionist model, which was already 
displaying problems. 

In Asia the tightly regulated Chinese economy and the less 
tightly regulated, but still centrally directed, Indian economy 
both began to show worrying signs of stagnation by the mid- 
1970s, 95 forcing governments to look for alternatives; in Latin 
America the import-substitutionist model was found wanting in 
its Argentinian homeland as economic and political crises 
erupted; in Africa the promises made by proponents of "African 
socialism" were not fulfilled as industrial growth was restricted 
by the narrowness of national markets and the meagre resources 
left after the depredations of imperialism. Adding to these prob- 
lems was a decline in the price on the world market for raw 
materials and foodstuffs — the main source of the export earnings 
needed to import equipment for new industries. Particularly after 
the onset of recession in the advanced countries in 1974, non oil 
producing Third World countries were caught between increased 
oil costs and a decline in the terms of trade for primary com- 
modity exports of nearly 50 percent. 96 

Those running industries which had grown up within the pro- 
tective barriers of the old model began pragmatically establishing 
links with foreign capital. Argentina, Brazil and Mexico were typi- 
cal. Their industrial bases had been established in the 1940s, 1950s 
and 1960s by the state intervening to direct investment in industry, 
often into state-owned companies. But the more farsighted indus- 
trialists — whether in the state or private sectors — saw that they 
could not get the resources and modern technologies needed to 
keep up with worldwide productivity levels unless they found ways 
of breaking out of the confines of the national economy. They 
began increasingly to turn to foreign multinationals for licensing 
agreements, joint production projects and funds — and they began 
themselves to operate as multinationals in other countries. 

The trend was reinforced by the success of a number of countries 
which had long oriented themselves to the world market in achieving 
very fast growth rates. In Asia four bastions of anti-Communism — 
South Korea, Taiwan, Hong Kong and Singapore — registered growth 
rates easily as large as those in Stalin's USSR. And in Europe coun- 
tries like Spain, Greece and Portugal, which Paul Baran had included 


Capitalism in the 20th Century 

as part of the underdeveloped world, grew rapidly enough to 
join that rich man's club, the European Community. Brazil began 
following a similar export-oriented path under the military 
regime that had seized power in 1964. Its still very large state 
sector and private capital alike increasingly oriented towards the 
rest of the world system rather than to a protected national 
market. The Western financial press rejoiced in this, assuring its 
readers that Brazil was the great rising Third World country 
whose industries were destined to challenge those of the West. 
And there certainly was growth. "For almost 15 years (1965-80) 
the average rate of growth was 8.5 percent, making Brazil the 
fourth fastest growing country". 97 

Other Latin American states began to emulate the Brazilian 
policy. The military coups in Chile (1973) and Argentina (1976) 
were followed by an opening to external capital. And again the 
outcome seemed encouraging at first. Under the Videla regime in 
Argentina "the rate of inflation was lowered, real output grew, and 
a current account surplus was generated", 98 while Chile's real GDP 
grew 8.5 percent a year between 1977 and 1980. 99 

It seemed that a way had been found to achieve national accu- 
mulation by breaking out of the confines of the national 
market — and, when the policies were undertaken under military 
regimes, of crushing popular resistance to rising levels of exploita- 
tion. There was a similar swing of the intellectual pendulum as in 
the West and the former Communist states, with the wholesale 
conversion of "dependency theory" economists to the wonders of 
free markets. The conversions continued even as the Latin 
American "miracle" came unstuck. 

Growth after 1974 had come to depend on foreign borrowing 
(as in Poland and Hungary in the same period). Many Latin 
American countries gambled on ambitious growth targets by bor- 
rowing heavily in international financial markets. The external 
debt of Chile and Argentina almost trebled over a few years, from 
1978 to 1981. 100 But this did not seem to matter at the time — either 
to the national governments or the international banking system: 

Up to the second oil price shock (1979-80) the gamble was 
worth taking. Export growth was sustained in world markets at 
favourable prices... As a consequence the ratio of debt out- 
standing to export proceeds was more favourable for all non-oil 
developing countries in 1979 than in 1970-72. 101 

The End of the Golden Age 


The IMF assured people in 1980, "During the 1970s.. .a gener- 
alised debt management problem was avoided... and the outlook 
for the immediate future does not give cause for alarm". 102 This 
was written just months before the second international recession, 
in the early 1980s, and caught all these states unprepared. As 
export markets shrank and international interest rates began to 
rise, the debts they had incurred in the 1970s crippled their 
growth, threw them into recession and blighted their economies 
right through the 1980s, which became known as "the lost 
decade" in Latin America, with a fall in GNP per person for the 
continent as a whole of 10 percent. 103 

The impact on local capitalists and mainstream political forces 
was not, however, to question the new opening to the world 
market. Rather it was to insist, as in Russia and Eastern Europe 
that the opening had not gone far enough. The new doctrine was 
accepted in one form or another by the late 1980s by populist 
politicians and even former guerrillas in Latin America, by the 
politburo in China, by the Congress Party leadership in India, by 
those who had once proclaimed their commitment to "socialism" 
in Africa and by the successors to Nasser in Egypt. 

The conversions were not always voluntary. The International 
Monetary Fund and the World Bank intervened where they could, 
making offers, mafia style, to debt-laden countries which their 
rulers rarely found themselves able to refuse, since doing so would 
rule out any sort of accumulation strategy. The various debt pro- 
grammes were more concerned with protecting the interests of 
Western banks than with ameliorating conditions in the indebted 
countries. But more was involved than just a surrender to imperi- 
alism on the part of the governments that accepted them. Those 
capitals, private and state alike, that had grown during the period 
of state-directed "development" did not see any way of continu- 
ing to expand within the confines of limited national markets. 
They wanted access to markets and to technological innovations 
outside national borders. They might allow, even encourage, na- 
tional governments to haggle over the terms on which capital in 
the metropolitan countries allowed this to happen, but they would 
not reject them outright. And in the process some of them were 
indeed able to develop more than a national profile. 

So the Argentinian steel maker TechNet took control of the 
Mexican steel tube maker Tamsa in 1993, acquired the Italian steel 
tube maker Dalmikne in 1996, and then went on to expand into 


Capitalism in the 20th Century 

Brazil, Venezuela, Japan and Canada, adopting the name 
Tenaris. 104 There is a similar pattern for some Mexican companies. 
In the late 1980s Alfa, the largest industrial group in Mexico, with 
109 subsidiaries spanning automotive components, food, petro- 
chemicals and steel, embarked on a growing number of joint 
operations with foreign firms. The glass maker Vitro, which had 
bought two American companies, became "the world's leading 
glass container manufacturer, with its market almost equally split 
between the US and Mexico". 105 The logical outcome of this in 
Mexico was for its ruling class to forget its old nationalism and to 
join the North American Free Trade Area and increasingly to op- 
erate as a subordinate component of US capitalism. 

Occasionally the collaboration produced positive results for 
wider sections of local capital, provided some job opportunities 
for the aspirant middle classes (in Ireland, South Korea, Malaysia, 
Singapore, Taiwan and coastal China), and even created condi- 
tions under which workers could boost their living standards 
through industrial action. All too often, however, it created still 
further indebtedness to foreign banks which the national states 
had to cope with. In such cases a narrow stratum of people gained 
a taste of the fleshpots of multinational capital while the condi- 
tions of the mass of people deteriorated, or at best remained 
unchanged. A yuppie class lived in protected enclaves as if it were 
in the wealthiest parts of the industrialised world (and often went 
a step further and lived part of the year there), while much of the 
population festered in ever proliferating slums and shantytowns. 

The assumption of the new economic ideology — most forcefully 
addressed in the "neoliberal" notions of the "Washington 
Consensus" of the IMF and World Bank — was that if some capital 
accumulation in some countries had been able to gain a new lease 
of life by reinsertion into the world system, it could do so any- 
where if only the last restrictions on trade and the movement of 
capital were removed. But the reality proved to be rather different. 
A few areas attracted new productive investment, but only a few. 
At the end of the century only a third of worldwide foreign direct 
investment went to the "emerging markets" of the Global South 
and the former Communist countries, and of this more than half 
went to just four countries — China/Hong Kong, Singapore, 
Mexico and Brazil. Another quarter went to just seven countries 
(Malaysia, Thailand, South Korea, Bermuda, Venezuela, Chile and 
Argentina), leaving 176 countries to share out the remaining 25 

The End of the Golden Age 


percent. 106 And much of the investment was not new investment at 
all, but simply the buying up of already operating companies by 
multinationals based in the metropolitan countries. 

These problems were most felt in the poorest regions of the 
world, especially Africa. However much they dismantled their old, 
protectionist, import-substitutionist policies, they still remained 
unattractive to the multinationals they wanted to woo: "Small, 
poor countries face increased barriers to entry in industries most 
subject to the global forces of competition". 107 

Much the same applied to exports. China and a few other coun- 
tries did continue to break into world markets. But the export 
orientation of these countries meant that their own internal mar- 
kets for foreign-produced consumer goods did not grow at a 
corresponding speed and that their expansion was, in part, at the 
expense of other countries in the Global South. So African coun- 
tries which had begun to enjoy some export growth in 
manufactured goods found themselves losing markets to China. 
The "combined and uneven development" that had characterised 
the long boom continued into its aftermath, with the difference 
that many economies actually contracted even as others grew 
rapidly. It was as if the "Third World" itself had split in two, 
except that immense pools of poverty remained even in the part 
that was growing. 

Those who ran the local states could often feel insecure even 
when the developmentalist strategy was successful in its own cap- 
italist or state capitalist terms. Their success depended upon a high 
level of domestic accumulation — and the other side of that, a high 
level of exploitation that could only be achieved by holding down 
workers' and peasants' living standards. But even when they suc- 
ceeded in getting high levels of accumulation (which was the 
exception rather than the rule) they remained weak in their bar- 
gaining position with the multinationals. As multinationals took 
over local firms, their proportion of the local capital investment 
could rise to 40 or even 50 percent of the total, increasing their 
leverage over local decision making. But states in the poorer parts 
of the world did not have anything like the same leverage over 
multinationals, since the small size of their domestic economies 
meant they probably accounted for no more than 1 or 2 percent of 
the multinationals' worldwide investments and sales. 

Huge gaps usually opened up between what those who ran the 
state had promised the mass of people and what they could deliver. 


Capitalism in the 20th Century 

High levels of repression and corruption become the norm rather 
than the exception. When the developmentalist strategy ran into 
problems, something else accompanied the repression — the hol- 
lowing out of the mass organisations that used to tie sections of 
the middle class to the state and, via them, some of the working 
class and peasantry. The oppressive state became a weak state and 
looked to foreign backing to reinforce its hold. 

All this happened as problems of profitability in the advanced 
countries drove their capitalists to look for any opportunity, how- 
ever limited, to grab surplus value from elsewhere. There was not 
much to be got from the poorest of the poor anywhere in the 
world, but what there was they were determined to get. 
Imperialism meant that at the top level of the system rival capital- 
ist powers argued vehemently with each other about how to satisfy 
their different interests. At a lower level, it meant constraining the 
local ruling classes of the Third World to act as collectors of debt 
repayments for the Western banks, royalty payments for the multi- 
nationals and profits for Western investors as well as for their own 
domestic capitalists. Debt servicing alone transferred $300 billion 
a year from the "developing countries" to the wealthy in the ad- 
vanced world. 108 A website dedicated to defending US overseas 
investment boasted: 

Most new overseas investments are paid for by profits made 
overseas. Foreign direct investment by US companies was only 
$86 billion in 1996... If you subtract out the reinvested earn- 
ings of foreign operations, the result was only $22 billion... US 
companies' overseas operations also generate income that re- 
turns to the US... In 1995, this flow of income — defined as 
direct investment income, royalty and license fees, and charges 
and services — back into the US amounted to $117 billion. 109 

There could be no end to the squeezing. The share of foreign in- 
vestors in the trading on the Brazilian stock exchange rose from 
6.5 percent in 1991 to 29.4 percent in 1995, 110 and the share of 
new Mexican government debt held by non-residents grew from 8 
percent at the end of 1990 to 55 percent at the end of 1993. 111 

Under such circumstances, the instability of the world economy 
in the aftermath of the "golden age" found heightened expression 
in the countries of the Global South. Even those expanding rapidly 
and extolled by neoliberal media commentators could suddenly be 

The End of the Golden Age 


faced with near insuperable debt problems, deepening slump and 
possibly accelerating inflation — as happened in Mexico in the 
early 1990s, Indonesia in the late 1990s and Argentina at the be- 
ginning of the 2000s. And the fate of the mass of people in 
countries regarded as marginal by international capital, like most 
of sub-Saharan Africa, was deepening poverty, repeated famines 
and, all too often, recurrent bouts of ethnic conflict spilling over 
into civil wars, often financed by foreign firms interested in con- 
trol of raw materials. There may never have been a golden age for 
such parts of the world. But there was certainly a leaden one. 

Restructuring through crises 

Global capitalism in the last quarter of the 20th century was 
marked once again by many of the features Marx had described. 
There were recurrent economic crises, and the restructuring 
through crisis of capitals, big and small, privately owned and 
state owned. 

Graph: Economic Growth of Industrial Countries ( — ) As Against IMF 
Predictions (~) U1 


1973 1976 1979 1982 1985 1988 1991 1994 

All the major industrial economies suffered at least three real re- 
cessions, except for France and Canada which each experienced 
one "growth recession" and two real recessions, and Japan which 
avoided a real recession for nearly 20 years after the crisis of the 
mid-1970s, only then to enter a 13-year period of near stagnation 
after 1992. 

In the former Soviet bloc countries recessionary tendencies of 
the late 1980s now turned into slumps. But soon different paths 


Capitalism in the 20th Century 

emerged. The former USSR (CIS in the graph below) suffered an 
enormous economic contraction, and output in 2000, even after 
two years of recovery, was only 70 percent of the 1990s figure. The 
picture was similarly miserable for Romania, Bulgaria, Albania 
and the bulk of former Yugoslavia. By contrast, the central 
European economies (CSB in the graph) only contracted to a little 
over 80 percent of the 1990s figure and recovered to begin to sur- 
pass it in 1998 — although this figure was still hardly greater than 
that for 1980. 113 

1990 1992 1994 1996 1998 2000 

All this meant continued, recurrent pain for those who laboured 
for and lived within the system. The big question, however, for the 
system itself was whether the restructuring caused by the crises 
would open up a new period of expansion. This we will look at in 
the next section of this work. 

The End of the Golden Age 


Part Three 



The Years of Delusion 

The new hype 

"A substantial decline in macroeconomic volatility" was "one of 
the most striking features of the economic landscape over the past 
20 years or so", declared Ben Bernanke in 2004. 1 Such had long 
been the view of most mainstream economists and politicians: 

New Paradigm advocates received cautious support from the 
US Treasury Secretary Larry Summers and chairman of the 
Federal Reserve, Alan Greenspan... Mr Greenspan said the 
recent economic performance was "not ephemeral". 2 

They spoke of the longest continuous period of American economic 
growth for four decades and the lowest level of unemployment for 
three. This was supposedly a new, unprecedented period of non-in- 
flationary capitalist expansion, baptised "the great moderation" or 
"the new economic paradigm". Stagnation, unemployment and in- 
flation had supposedly been left behind. 

For Bernanke, the explanation lay in the greater capacity of the 
states and central banks to handle the money supply than in the 
1970s. For others it lay in the new technologies associated with the 

A new economy has emerged from a spurt of invention and in- 
novation, led by the microprocessor... opening all sectors of the 
economy to productivity gains... The new economic paradigm 
has brought us the best of all worlds — innovative products, new 
jobs, high profits, soaring stocks. And low inflation. 3 

The advances of what was called "Anglo-Saxon capitalism", 
supposedly based on unleashing "economic freedom" and 


"entrepreneur ship", were contrasted with the laggardly rates of 
growth in Europe and the stagnation in Japan. In Britain New 
Labour boasted it was following the US example. "No return to 
boom and bust" was the refrain in every budget speech of chancel- 
lor of the exchequer (and future prime minister) Gordon Brown. 

The enthusiasm had received a temporary setback when the 
Asian crisis of 1997 spread to about 40 percent of the world. The 
Financial Times had headlines about an "economic meltdown" 
and "a house of cards", while the BBC ran a special Newsnight 
programme, "Is Capitalism Collapsing?" But the panic did not 
last for long. Within months the new paradigm was rising high 
again: both Patrick Minford, former economic adviser to 
Margaret Thatcher, and Meghnad Desai, former economic ad- 
viser to Gordon Brown, insisted in debates late in 1998 that all 
that had occurred was a passing storm of no significance, and all 
problems had been solved by quick intervention by the US 
Federal Reserve. 4 There was brief panic again in the summer of 
2001 as the US went into recession. "The world economy is 
starting to look remarkably, even dangerously, vulnerable", 
stated the Economist. "Industrialists and bankers at their annual 
get together on banks of Lake Como did little to disguise their 
over-riding pessimism", 5 reported the Financial Times. But again 
amnesia soon set in and financial commentators were describing 
the economic panic of a few months earlier as "the recession that 
was over before it began" 6 — despite, or perhaps because of, the 
loss of one in six manufacturing jobs in the US. Renewed eco- 
nomic growth in the US led to even greater optimism than 
before. The International Monetary Fund could declare year 
after year that the picture for the future was of fast economic 
growth. So in April 2007 a typical IMF press release about its 
most recent world survey read, "Global economy on track for 
continued strong growth". There were a few mainstream 
doubters, but their worries were only ever discussed in order to 
be dismissed. 

The overall message was that capitalism was going from 
strength to strength with supposedly record world growth fig- 
ures. Even those sceptical about the claims for the advanced 
countries often accepted a modified version of the optimism 
when it came to the system as a whole. Hardly a day went past 
without media references to the "new giants", China and India, 
and soon compliments were being poured on the other countries 


The New Age of Global Instability 

included with them in the new "BRICS" rubric — Brazil, Russia 
and South Africa. Even if the old industrial states were to run 
into problems, these new centres of capitalist growth would 
maintain the stability of the world system. The faults that were 
recognised in the global system were regarded rather as Stalin's 
admirers used to speak of his "occasional errors", as "spots on 
the sun". 

Hidden problems 

For those commentators prepared to look honestly and go a little 
deeper than immediate appearances, there were disturbing signs. 
While the IMF, for instance, was exuberant about prospects, re- 
search commissioned by the World Bank painted a rather different 
picture. Growth for the world as a whole was well down on the 
levels not only of the long boom, but also of the first decade and a 
half after its end: 

Graph three: world GDP growth rate 1961-2006 7 

It was only possible to draw a different conclusion, as an IMF 
graph in the April 2007 World Review seemed to, by starting the 
series in 1970 — with the beginning of the end of the long boom. 8 
Parallel with the decline in growth rates went a long-term slow- 
down in global investment, as research for the IMF revealed (see 
graph below). 

The Years of Delusion 


World accumulation 9 

The fall in accumulation and the growth of output took place 
alongside a continuing low level of the rate of profit compared 
with the "golden age". There had been some recovery from the 
low point of the early 1980s, but only to reach about the level of 
the early 1970s — the turning point that ended the "golden age". 
Calculations for the US suggest that recovery of profitability 
from the recession of 2001-2 through the years immediately 
preceding the credit crunch of 2007 again failed to raise it to 
anything like the level of the long boom. Robert Brenner shows 
it moving marginally ahead of the early 1970s figure, only then 
to fall back. David Kotz shows the profit rate in 2005 as 4.6 
percent, compared with 6.9 percent in 1997. 10 Fred Moseley 
shows a bigger recovery of recent profit rates, but his calcula- 
tions still leave them at their high point (in 2004) as only 
marginally above their lowest points in the long boom. 11 The 
overall pattern of the 1990s and the early 2000s was a continu- 
ation of that of the 1980s — of a certain recovery of profit rates, 
but not sufficient to return the system to the long term dy- 
namism of the long boom. 

Marx saw restructuring through crisis as enabling capitalism to 
recoup the rate of profit, and the "Austrian School" of mainstream 
economics likewise saw crises as the only way to reinvigorate the 
system. Each crisis in the 1980s, 1990s and early 2000s did lead 
to widespread restructuring of industry. There were closures of 
factories, mines and docks in all the world's industrial heartlands. 
Industries which had characterised whole regions decamped; 
others saw their workforces shrink to half or a quarter of their 
former size, as with the heavy industries of northern China, 
Detroit's car plants, the Polish shipyards and the meat refrigera- 
tion plants of Greater Buenos Aires. 


The New Age of Global Instability 

But the restructuring through crises did not have the full effect it 
had had in the "free market" period of capitalism from the early 
19th century until the First World War. It did not get rid of un- 
profitable capital on a sufficient scale to raise profit rates to the 
levels of the 1950s and 1960s. The neoliberal ideology may have 
embraced the notion of "creative destruction", with its implication 
that some giant firms must be allowed to go bust in the interests of 
the others. But the practice of states — and of the pressures which 
industry and finance put on states — was rather different. The fear 
of what the collapse of the really big corporations and banks 
might do to the rest of the system persisted. 

Hardly any big firms had been allowed to go bust during the 
first two crises of the mid-1970s and early 1980s. Governments 
had continued to step in to keep them afloat, most notably with 
the US state's support for the bail-out of the car giant Chrysler at 
the end of the 1970s, of the Continental Illinois bank in 1984 and 
of the Savings & Loans corporations (the US version of building 
societies) in the late 1980s. Things changed to some degree from 
the late 1980s onwards. As the Bankruptcy Year Book reports: 

During the 1980s and early 1990s record numbers of bank- 
ruptcies, of all types, were filed. Many well known companies 
filed for bankruptcy... Included were LTV, Eastern Airlines, 
Texaco, Continental Airlines, Allied Stores, Federated 
Department Stores, Greyhound, R H Macy and Pan Am... 
Maxwell Communication and Olympia & York. 12 

The same story was repeated on a bigger scale during the crisis of 
2001-2. The collapse of Enron was, as Joseph Stiglitz writes, "the 
biggest corporate bankruptcy ever — until WorldCom came along". 13 
This was not just a US phenomenon. It was a characteristic of 
Britain in the early 1990s, as bankruptcies like those of the 
Maxwell Empire and Olympia & York showed, and, although 
Britain avoided a full recession in 2001-2, two once dominant 
companies, Marconi/GEC and Rover, went down, as well as scores 
of recently established dotcom and hi-tech companies. The same 
phenomenon was beginning to be visible in continental Europe, 
with an added twist in Germany that most of the big enterprises of 
the former East Germany went bust or were sold off at bargain 
basement prices to West German firms, 14 and then in Asia with the 
crisis of 1997-8. On top of this there was the bankruptcy of whole 

The Years of Delusion 


states — notably the USSR, with a GDP that was at one stage a 
third or even half that of the US. 

However, governments had certainly not completely given up 
intervening to limit the impact of crises on large capitals, nor had 
the most important capitalist sectors stopped demanding such in- 
tervention. This was shown by the way the US Federal Reserves 
stepped in to save the Long Term Capital Management hedge fund 
in 1998. A worldwide sample of "40 banking crisis episodes" in 
2003 found that governments had spent "on average 13 percent of 
national GDP to clean up the financial system." 15 Governments as 
varied as those of Scandinavia and Japan had rushed to prop up 
banks whose collapse might damage the rest of the national finan- 
cial system — even if this involved nationalisation as a last resort. 16 
Governments took the costs of writing off losses away from par- 
ticular individual capitals. But those costs had then to be covered 
from elsewhere in the system — either by taxation, hitting the real 
wages of workers or the profits of capital, or by borrowing which 
eventually had to be repaid somehow from the same sources. The 
benefits for those capitals which survived the crisis were limited as 
a result. The rising rate of bankruptcies only partially relieved the 
pressure on their profit rates. 

Further relief came from a slower rise in investment compared to 
productive labour power (Marx's organic composition of capital). 
The slowdown in accumulation due to lower profitability played a 
role in this. So did continued waste expenditure, particularly mili- 
tary expenditure. This absorbed a considerably lower level of world 
output than in the 1950s and 1960s, let alone than during the 
Second World War. But it still absorbed a much higher amount than 
in the pre- 193 9 world. And there had been an increase in US mili- 
tary expenditure during the "Second Cold War" of the 1980s under 
Ronald Reagan, and again with the "war on terror" under Bush in 
the early and mid-2000s — and since US military expenditure was 
half the global total, this meant an overall increase across the 
system. One estimate is that by 2005 US military spending had 
risen to a figure equal to about 42 percent of gross non-residential 
private investment 17 — a big drain on resources that could otherwise 
have gone into accumulation. At the same time, unproductive ex- 
penditures in the financial sector soared, as we shall see later. 

The effect of all of these forms of "waste" was much less bene- 
ficial to the system as a whole than half a century earlier. They 
could still reduce the downward pressures on the rate of profit 


The New Age of Global Instability 

from a rising organic composition of capital — it certainly does not 
rise as rapidly as it would have done if all surplus value had gone 
into accumulation: "The rate of growth of the capital/labour ratio 
fell in most countries" in the 1990s. 18 But the old industrial capi- 
talist countries paid the price for a continued slowdown in 
productive accumulation and long-term growth rates. 

Changes in profit rates of six decades 19 

Manufacturing Non-farm/ 


Non-financial corpns 




























Evolution of i 

capital intensity and capital stock 10 

(Average annual growth rate) 




United States 

Capital stock 




Capital/labour ratio 





Capital stock 




Capital/labour ratio 





Capital stock 




Capital/labour ratio 





Capital stock 




Capital/labour ratio 





Capital stock 




Capital/labour ratio 




United Kingd< 

om Capital stock 




Capital/labour ratio 




Two other factors can have some impact on the level of investment 
capitalists have to undertake to remain competitive. There is the 
increase in the speed at which capital produces and sells com- 
modities (what Marx called the "turnover time" of capital) as a 
result of advances in transport technology and of the computeri- 
sation of warehousing and stock keeping (what are often called 

The Years of Delusion 


today "logistics"). An estimate is that "capital services" grew 2 to 3 
percent faster than the capital stock in the late 1980s and 1990s for 
most countries. 21 This would have reduced the costs to capitals of 
holding stocks of raw materials on the one hand and of goods await- 
ing sale (their "circulating capital"). But the second factor will have 
worked from the opposite direction — the reduced lifetime fixed cap- 
ital had before it became outdated (what is known as "moral" 
depreciation). Computers and software become obsolescent because 
of technical advances much more quickly than other capital equip- 
ment — in perhaps two or three years rather than ten, 20 or even 
30 — and the increased depreciation costs cut into profits. 22 

This was ignored by the argument of the late 1990s and early 
2000s that the increase in productivity due to massive growth of 
cheap computing power was the basis of a new era of continuous 
growth. As we saw in Chapter Three, the more rapidly firms have to 
replace their fixed capital, the more it cuts into any increase in profits 
they got from installing it in the first place. What is more, once a new 
technology has spread beyond the firms that first introduce it, its 
effect is to reduce the value of each unit of output: the late 1990s and 
the early 2000s were a period in which the prices of goods produced 
by the new technology tumbled, leading to increased competitive 
pressure on all the firms in these industries. A wave of innovation 
could no more create an endless boom in the late 1990s and early 
2000s than it could in the "new era" of the 1920s. 

The most important factor in reviving profit rates was not com- 
puterisation, or the reorganisation of capital as such, but the 
increased pressure capital was able to put on those who worked 
for it as successive waves of restructuring disrupted old patterns of 
working class resistance. Capitals took advantage of the redun- 
dancies and dislocations caused by restructuring to put relentless 
pressure on workers to work harder while wages were held down. 

There was a decrease in the share of national income going to 
labour in all of the major Western economies. In the United States, 
"productivity grew 46.5 percent between 1973 and 1998", while 
the median wage fell by about 8 percent 24 and that for production 
workers by 20 percent 25 (with workers only able to protect their 
living standards by an increase in average working hours from 
1,883 hours in 1980 to 1,966 in 1997 26 ). Western Europe did not 
see the same increase in hours (apart from in Britain, where unpaid 
overtime soared) or a reduction in real wages as in the US in the 
1980s and 1990s, but governments and firms began to push 


The New Age of Global Instability 

OECD Employment Outlook, 2007, pi 17 


50 H — ' — ' — ' — ' — i — ' — ' — ' — ' — i — ' — ' — ' — ' — i — ' — ' — ' — ' — i — ' — ' — ' — ' — i — ' — ' — ' — >— i — ' — ' — ' — ' — i — 
1970 1975 1980 1985 1990 1995 2000 2005 

for both in the new millennium. "Real wages have fallen dramati- 
cally and working hours are nearly back to 40 a week", reported 
the BBC on Germany in 2005. 27 

It was not only wages and working conditions that had to be put 
under pressure. So too did the various services provided by the state 
(and in some case by private firms) that make up the "social wage": 
healthcare, pensions, education. During the long boom these had 
been, as we have seen in Chapter Seven, by and large, paid for out of 
the taxes on the working class, as is shown by figures by Anwar 
Shaikh for what he calls "the net social wage" — the difference be- 
tween what workers pay in and what they get out (see Graph A 
below). 28 But the impact of recurrent crises, rising unemployment 
and an ageing population had been to push welfare expenditures up- 
wards (Table B), until even in the US the cost could no longer always 
be covered by the taxation on workers and therefore tended to hit 
capital. The figures show enormous unevenness between the degree 
to which different states — and firms operating in those states — were 
hit by both the overall level of the "net social wage" and the rise in 
the welfare expenditures in the 1970s and 1980s. They responded 

The Years of Delusion 


by a series of "reforms" (in reality counter-reforms) which, under 
the label of "modernisation", aimed at reversing this trend. 

Net social wage as percent of GNP ( Graph A) 


1960 1965 1970 1975 1980 1985 

Germany, Canada, the UK, Australia and Sweden 

The US 

Welfare expenditure as percent of GDP 1979 and 199S 29 (Table B) 






















United Kingdom 



United States 



Uneven competitiveness 

Each success any one government had in doing this put pressure 
on other governments to do likewise. But real wages could not be 
cut, working hours prolonged, or welfare benefits curtailed with- 
out causing popular resentment with the potential to explode into 
all out resistance. The level of resistance varied from country to 
country, depending on established levels of working class organi- 
sation and the outcome of key attacks on it (like the defeat of the 
long 1980s strikes of air traffic controllers in the US and of miners 


The New Age of Global Instability 

and print workers in Britain). The most visible result was that the 
proportion of national output going to welfare in the mid-1990s 
in France and Germany was about 14 percent higher than in the 
US and over 6 percent higher than in Britain. The same contrast 
between the success of the capitalist offensive in the US and Britain 
and its effects in Europe was shown by the figures for working 
hours. In these trends lay the supposed advantage of the "Anglo- 
Saxon" model over the European model for the capitals based 
within each. 

Annual hours worked per worker, 2004 30 













European capital found itself facing problems it had not faced in 
the years of the boom or even in the decade and a half after it col- 
lapsed. Output per head in what is now the Eurozone had grown 
from 40 percent of the US figure in 1950 to 75 percent in 1975, 
and German growth, like that of Japan, exceeded that of the US in 
the 1980s. In 1990 German unification was expected to provide a 
further massive boost. The mood by the beginning of the new mil- 
lennium was very different. Overall productivity levels had long 
since stopped catching up with the US. Those challenging the US 
auto industry on its home ground were Japanese transplant plants, 
not Volkswagen and Fiat. Japan may have lost out to the US in 
computers, but at least it had a computer industry while Europe 
did not. And coming up on the outside in the inter-capitalist race 
was China. "Europe needs to wake up" was the message pumped 
out by scores of Euro think tanks, endorsed by centre-left and 
centre-right politicians alike and inscribed in the Lisbon 
Declaration of European leaders in 2002. 

The picture for European capitalism was not as dire as that mes- 
sage sometimes made out. Germany, not China, was still the 
world's biggest exporter in 2006 and its manufacturing industry's 
output had grown rapidly, even if its employment had not. The 
EADS airbus consortium was able to compete with Boeing in a way 

The Years of Delusion 


that the Japanese aerospace industry could not. Spanish and French 
firms had gobbled up many of Latin America's banks, and the 
European Union sold and invested slightly more in the Mercosur 
region of that continent than did the US. And for the moment 
Chinese imports only amounted to 1 percent of European GDP. 

There were, nevertheless, reasons for European-based capital- 
ism to worry and to nag states to take action on its behalf. French 
and German based capitals faced the dilemma that although they 
were more productive in output per hour worked than capital 
based in the US 31 they lost out in terms of overall productivity be- 
cause of the few hours they got from each worker in a year. 

European capital therefore found itself under pressure from at 
least three sides in global markets — from the US and Japan in high 
technology products and from China in lower technology prod- 
ucts. Its response was to push for copying the US approach of 
imposing "flexible labour markets" so as to get longer working 
hours and more intensive production (in Marx's terms absolute 
and relative surplus value) and to try to cut back on welfare ex- 
penditure. This was the rationale behind "neoliberal" policies, 
with counter-reforms of welfare and the use of marketisation and 
privatisation measures to get workers competing with each other. 

German capital followed a policy through the Bundesbank (and 
then the European Central Bank) in the 1990s of sacrificing eco- 
nomic growth to hold down wages (which rose cumulatively 10 
percent less than the European average) and so increasing exports 
and the share ofprofits. The paradoxical outcome was that Germany 
had a big trade surplus and good profits, but a reduced share of 
world investment and production. This lay behind the pressure it 
applied successfully in the early 2000s to getting the then Social 
Democrat-Green government to push through counter-reforms in 
the Agenda 2010 Programme. Its main planks were a drastic re- 
duction of unemployment benefits by a third, denying any benefits 
at all to 800,000 people, forcing the unemployed to accept jobs 
with below average pay, freezing pensions and charging for visits 
to doctors. Meanwhile, big firms threatened to move production 
to low wage sites in Eastern Europe if workers did not accept in- 
creased working hours. Such "internal modernisation", said 
Chancellor Schroeder, was "the prerequisite for Germany's asser- 
tion into global politics." 32 The overall result was that German real 
wages fell for the first time in half a century. The same logic lay 
behind the attempts of French governments to cut back on public 


The New Age of Global Instability 

sector pensions, to reduce the rights of young workers and to do 
away with the 35 hour week. 

But this was an economic strategy that raised big political prob- 
lems. For half a century after the Second World War capital and 
the state sought to legitimise themselves through the ideology of 
national consensus while collaborating to various degrees with the 
trade union bureaucracy. This applied not only to social democ- 
racy in Germany and France, but also to the Christian Democrat 
and Gaullist variants of conservative politics. There had seemed 
no reason to disturb society by overturning this approach so long 
as their economies seemed to be advancing in comparison with 
their major competitors. Now the attempt to attack the reforms 
granted in the past threatened to tear apart the old ideological 
hegemonies, driving workers whose social democratic attitudes 
took for granted "partnership" with capital into an antagonistic 
relationship to it. Capitalists and states were caught between their 
economic priorities and maintaining their ideological hold on the 
mass of people. 

Of course, there was also in operation a second option for 
them — that of physically moving production overseas. But this 
takes time with most sorts of industrial production (fully 
equipped factories are rarely easy to move, and even when they 
are there is then the question of energy supplies, transport facili- 
ties, a secure political environment, and so on). So it was that 
even in Britain 30 years of restructuring and factory closures, 
with a halving of the workforce, did not permanently cut overall 
manufacturing output. 33 

Even when they considered moving production in the long 
term, the giant European firms still depended in the interim on 
finding some way to increase the exploitation of their local work- 
forces. In practice few firms envisaged, for the moment, moving all 
their production abroad (although the German car industry in- 
creasingly used cheap labour in Eastern Europe to solve some of 
its problems) and this made the need to raise the exploitation of 
the domestic workforce paramount. 

Hope in the East? 

When people like Samuel Brittan wrote of the future for capital- 
ism lying in Asia in the early 1990s they meant the small newly 

The Years of Delusion 


industrialising countries of the region — the "tigers" of South 
Korea, Singapore, Hong Kong and Taiwan, and the "tiger cubs" 
of Malaysia, Thailand and Indonesia. These had experienced very 
rapid rates of economic growth, leading the OECD to write of a 
South Korean "economic miracle" in 1996. By this time Korean 
living standards approximated to those of the poorer Western 
European countries; some of the country's firms established them- 
selves as global giants. Posco, the world's third largest steel 
producer, boasted that its Kwangyang steel complex, opened in 
1992, was "the most modern in the world". 34 But much of the 
growth depended on each tiger holding wages down to compete 
with the others for Western markets. It was a classic case of blind 
competition between rival capitals (or in this case state monopoly 
capitals) and eventually led to output that was too great for the ex- 
isting market to absorb. By June 1997 there was only 70 percent 
capacity utilisation in Korea and 72 percent in Taiwan, 35 and all 
the countries depended on foreign borrowing to finance trade 
deficits. Yet when financiers suddenly reacted by withdrawing 
funds from Thailand, forcing the devaluation of its currency, those 
enamoured of the "miracle" tried at first to think nothing serious 
was happening. The Thai crisis, wrote Martin Wolf in the 
Financial Times , was "nothing more than a blip on the path of 
rapid East Asian growth". Within weeks the crisis had spread to 
all the tigers and tiger cubs, causing economic contraction, reliance 
on IMF austerity packages, the sudden impoverishment of millions 
of people and growth rates in the 2000s much slower than in the 
1980s and 1990s. But this did not shatter the faith in many quar- 
ters that capitalism in East Asia could see off any problems that 
might be encountered in the West. Communist China became the 
new bearer of their hopes. 

Certainly the emergence of China as an economic power was 
one of the most important developments within the world system 
at the beginning of the 21st century. The scale of Chinese eco- 
nomic advance was awesome. Its average growth rate for the 
period 1978 to 2008 was about 8 percent a year; its economic 
output was about nine times greater at the end of the period than 
at the beginning; its share of world trade had risen from less than 
1 percent in 1979 to over 6 percent in 2007, until it was just 
behind Germany, the world's biggest single exporter; by 2005 it 
was "the leading producer in terms of output in more than 100 
kinds of manufactured goods", including 50 percent of cameras, 


The New Age of Global Instability 

30 percent of air conditioners and televisions, 25 percent of wash- 
ing machines and 20 percent of refrigerators. 36 Chinese cities like 
Beijing, Shanghai, Guangzhou or even Xian in the interior no 
longer bore much resemblance to Third World stereotypes. The 
forests of skyscrapers in Beijing or Shanghai made London's much 
vaunted Docklands development look like Toytown, while the vast 
industrial developments around Shanghai had few comparisons in 
Western Europe. Dramatic changes were taking place in what was 
previously assumed to be a "backward" country of limited eco- 
nomic significance to the world system. 

China, like most other industrialising Third World countries, 
had suffered a crisis just as the long boom was coming to an end in 
the West. A quarter of a century of what Marx had called primi- 
tive accumulation had transformed tens of millions of peasants 
into wage workers and built up some of the bases of modern in- 
dustry — but this industry was no match in terms of efficiency for 
that in many other parts of the world system. The sheer scale of 
exploitation of the mass of the population led to all sorts of pres- 
sures building up from below, while the inability to keep up the 
pace of industrialisation led to repeated crises within the ruling 
group. These culminated in massive political upheavals in the 
years 1966-75 (from the "Cultural Revolution" to the rise and fall 
of the "Gang of Four") which were only finally resolved after Mao 
Zedong's death in 1976. 

The resolution of the crisis consisted of ad hoc moves to a new 
structure of accumulation. A series of reforms pushed through in 
1978-81 began with relief for peasants through a raising of the 
purchasing price paid by the state for their produce. The peasants 
were now free to decide how to use some of the surplus left after 
(just about) feeding themselves. There was a huge rise in agricul- 
tural production, and the increased incomes provided a market for 
some of the under-utilised industrial capacity. A loosening of state 
controls allowed it to satisfy this demand, and overall output 
soared ahead. 

Increasing social differentiation within the peasantry led some 
to accumulate a surplus and then to use the new freedoms from 
state control to invest in establishing locally based "village indus- 
tries". Formally owned by village governments, in practice these 
provided a means of self-enrichment by those with connections to 
the local party apparatus. A new market capitalism grew up in the 
south east of the country alongside the old state capitalism centred 

The Years of Delusion 


mainly in the north, and the regime allowed the new industries to 
link up with overseas Chinese capitalist interests in Hong Kong 
and elsewhere. 

The surplus passing from the peasantry into the hands of three 
groups of capitalists (state, "village" and overseas) was still mas- 
sive despite the reforms, while low peasant incomes meant a ready 
supply of workers for the new industries, which did not even have 
to provide the guaranteed minimum living standards and social 
protection (the so-called "iron rice bowl") of the old state-run 
heavy industries. In effect, there was a new model of capitalist ac- 
cumulation, combining the high level of exploitation and 
repression of the old state capitalism with a turn towards catering 
for markets — and the markets came increasingly from exporting 
to the rest of the world system, while providing for the increas- 
ingly conspicuous consumption of the old state bureaucracy on the 
one hand and its children as they took over privatised industries 
on the other. 

The new hybrid economy had contradictions of its own, with 
the ups and downs of market capitalism superimposed on the ups 
and downs of the old state capitalist accumulation model. There 
were wild fluctuations in growth rates. The scale on which the new 
industries competed with each other for resources created short- 
ages and forced prices up, until the state tried to impose some 
order on the market by curtailing funds for further investment. So 
the growth rate could be above 20 percent in 1984, down to 
around 3 percent in 1985 and back up to close to 20 percent in 
1988. There then followed a major economic, social and political 
crisis in 1989 as growth fell right back and prices soared. This was 
the economic background to tumultuous student and worker 
demonstrations in 1989 in most of the major cities, most famously 
in Tiananmen Square in Beijing. 

The regime found a way out of the crisis from 1992 onwards 
almost by accident. Unable to control things itself, it placed its 
hopes on unleashing a new round of accumulation based on un- 
controlled competition between different industrial concerns. 
Those who ran village governments were able to turn the new in- 
dustries into their private property and link up with foreign 
capital, as were the managers of the great state-owned enterprises. 
There was a massive rationalisation of old industries, with perhaps 
30 million workers losing their jobs. These measures were ac- 
claimed as "progressive" by pro-capitalist economists right across 


The New Age of Global Instability 

the world. What they meant for workers was portrayed graphi- 
cally in the 2003 Chinese film Blind Shaft, in which the degrading 
conditions under which the miners work lead two of them to 
murder a co-worker in an attempt to blackmail corrupt managers. 
The closeness of reality to the fiction was shown in a mining disas- 
ter in Guangdong (supposedly China's most "advanced" province) 
in the summer of 2005. As more than 100 miners suffocated un- 
derground, the owner fled when it was revealed he had paid out 
millions of dollars in bribes to take over the previously shut down 
state-owned mine, and at the same time to buy himself a senior po- 
sition in the local police force. In this way he had been able to 
ignore all safety precautions while parading himself as an exem- 
plary "entrepreneur" for his role in supplying coal to satisfy the 
energy needs of a booming economy. 37 

Alongside the attack on the old working class was a renewed 
upping of the level of exploitation of the rural workforce, who still 
made up two thirds of the total. One (banned) Chinese study told 
of a fall of 6 percent in peasants' per capita farming incomes after 
1997, and "given the rising costs of health and education, their 
real purchasing power has probably fallen still further". 38 But the 
average does not tell the whole story. Class differentiation within 
the peasantry involved local officials using their powers to grab 
money (in the form of local taxes) and land off other peasants with 
the aim of enriching themselves as petty agrarian capitalists — the 
cause of many local near-uprisings. 

Enthusiasts for capitalism claimed the turn to the market had 
led to an unprecedented lifting of hundreds of millions of people 
out of poverty. And the abandoning of the crude methods of prim- 
itive accumulation in the mid-1970s had permitted much of the 
industry built up through its methods to be used more produc- 
tively, with the result that not only the new rural capitalists but 
also those from peasant families who moved to work in the cities 
could enjoy improved living standards. But for the great majority 
of the population, they were still low living standards. The World 
Bank admitted in the early 2000s that 204 million people, or one 
in six of the population, still lived on less than $1 a day. Other es- 
timates suggested that "the vast majority of the 800 million 
peasants" had incomes at this level. 39 

The key to China's rapid growth rates was an unparalleled level 
of accumulation. The proportion of national output going into in- 
vestment rose to 50 percent in 2006: 40 

The Years of Delusion 


In recent years, no OECD or emerging market economy had a 
ratio greater than 30 percent (averaging over three years to 
smooth out cyclical effects).. . Even compared to Korea and Japan 
during their boom years, the ratio in China today looks high. 41 

The rising investment was paid for out of total savings in the econ- 
omy also rising to over 50 percent of output. Some of the saving 
was by workers and peasants, who needed it in order to pay for 
emergencies like medical care and for their old age. Effectively, 
they handed over a portion of their incomes to state-run banks 
which have then loaned it to state and privately owned enterprises. 
But in the early and mid-2000s an increasing proportion of saving 
came out of the profits made by companies, which rose by about 5 
percent of GNP in the early 2000s. 42 This was possible because 
household consumption as a share of output fell sharply, to only 
about 40 percent, 43 with the share of wage income falling from 67 
percent in the 1970s to around 56 percent in 2005 (see graph). 44 

70 H 


40 J — . — . — . — i — i — i — i — i — i — . — . — i — i — i — . — i — . — . — i — i — i — i — i — i — !— 
1980 1984 1988 1992 1996 2000 2004 

The decline in wage share did not necessarily mean a decline in 
real wages, since it was a declining share of rising output. What it 
did mean, however, was that China's economy exemplified Marx's 
picture of accumulation taking place for the sake of accumulation. 
The picture was even starker if the section of the economy devoted 
to exports was taken into account. By the turn of the millennium 
80 percent of new growth each year was going to investment and 
exports as opposed to satisfying the needs of China's people, and, 
in a further twist, by 2007 nearly 10 percent of China's income 
took the form of a surplus of exports over imports that was then 
deposited in the United States — effectively used to finance govern- 


The New Age of Global Instability 

ment or private American consumption (graph 45 ), which then pro- 
vided an outlet for further Chinese exports. 



Private consumption 

. ^ (left scale) 




" " " ^^^^^ 




(left scale) 



i 1 i 1 


2000 2002 2004 2006 

Accumulation at such a rate created three sets of problems, all of 
which Marx had been familiar with. First it draws in resources on 
a massive scale, creating shortages that push prices up. The impact 
of Chinese growth in the early and mid-2000s was to absorb raw 
materials and foodstuffs from across the world, raising their prices 
internationally (and in the process giving an economic boost to 
raw material producers in places like Latin America) — and even- 
tually the rising prices fed back into China. 

Second, it leads to a growth of output that cannot be absorbed 
by a national economy in which wages constitute a diminishing 
share of output, except by still more accumulation — or by ever 
greater stress by firms on exports. 

But there is enormous competition in export markets — not just 
from enterprises abroad, but with other enterprises operating in 
China. The increasing pattern has been one of Chinese factories 
assembling components produced elsewhere in East and South 
East Asia, with the final output then being exported. This ties 
Chinese based exporting firms into competing multinational 
supply lines: "The percentage of exports produced by foreign- 
based corporations grew from 17.4 percent in 1990 to 50.8 
percent in 2001". 46 By the early 2000s the result of such competi- 
tion was a level of output that could not always be absorbed 
completely by the world market any more than by the domestic 
market. The National Statistics Bureau reported that "of all 
Chinese manufactured products, 90 percent are in oversupply", 47 
despite massive price cutting: "Among Chinese companies the 
price war is particularly intense because competitors often chase 

The Years of Delusion 


market share rather than trying to increase short term profitabil- 
ity," a Financial Times correspondent could report: "Relentless 
competition among local suppliers keeps profit margins almost in- 
visible for many firms". 48 

It was not only the output of export-directed consumer goods 
that tended to get out of hand. "Investment in many sectors — 
including property, cement, steel, cars and aluminum" was 
"being overdone", Chinese government officials complained. 49 
In a system constructed around the goal of accumulation for the 
sake of accumulation and then left to run itself, top managers 
measured their success by the speed at which their firms grew — 
and the government-run banks then rewarded those that grew 
fastest by allowing them to accumulate debts. 50 

A third problem, which exacerbated the previous two, was that 
the ratio of investment to workers employed — and to output — was 
rising, despite the abundance of labour. While investment was in- 
creasing by about 20 percent a year, employment growth 
throughout the economy as a whole was only about 1 percent — and 
even in urban areas it was only about 3.5 percent. Total manufac- 
turing employment fell from 98 million in 1997 to 83.1 million in 
2001, 51 despite the massive rate of accumulation. The fall was due 
to large-scale redundancies in the old state-owned heavy industries, 
but it was not compensated for by the increased employment in the 
newer manufacturing enterprises — and employment in the "sec- 
ondary sector" 52 as a whole remained more or less static at round 
157 million. In other words, the organic composition of capital rose. 
Researchers for the IMF reported, "The increase in investment" 
from the mid-1990s to the mid-2000s had led to "a rise in the capi- 
tal output ratio and a fall in the marginal product of capital". 53 

The effect was bound to be downward pressure on profitability. 
Phillip O'Hara calculates the rate for the economy as a whole as 
declining from 47 percent in 1978 to 32 percent in 2000. 54 Jesus 
Felipe, Editha Lavina and Emma Xiaoqin Fan point to the same 
trend, but with different absolute figures, from 13.5 percent in the 
1980s to 8.5 percent in 2003. They quote results from Lardy and 
from Lin which show the same trend — with some of Lin's figures 
showing very small profit rates indeed for some industries (0.2 per- 
cent for bicycles, -0.3 percent for buses, 2.9 percent for washing 
machines, 2.5 percent for beer). 55 A Chinese study by Zhang Yu 
and Zhao Feng seems to contradict these conclusions, showing the 
overall rate for manufacturing as falling continually for the 20 


The New Age of Global Instability 

years up to 1999, but rising considerably after that. 56 The discrep- 
ancy could be explained by the way the massive onslaught on jobs 
in the state enterprise sector cut into its operating costs. The great 
counteracting factor preventing a catastrophic fall in profit rates 
was the continual fall in the share of output going to wages. But 
this necessarily prevented domestic consumption from absorbing 
the growing industrial output, further increasing the dependence 
of accumulation on further accumulation and on exports. 

At the same time, there was considerable evidence that the will- 
ingness of the banks to lend to enterprises at low rates of interest 
compensated for the low profit rates of many enterprises — and 
that parallel with this went a willingness not to push loss-making 
enterprises into bankruptcy, so loading the banking system with 
vast, probably unrepayable debts. 57 

As with any capitalist boom, there was a burgeoning of all sorts 
of speculation as enterprises and rich individuals sought to find 
quick and apparently effortless sources of profitability: 
"Investment in real estate grew by almost 20 percent a year over 
the past four years [to 2005] and reached 11 percent of GDP in 
2005". 58 Everywhere in China's major cities there was apparently 
endless building and rebuilding of luxury apartment blocks, rela- 
tively expensive (by Chinese standards) fast food outlets, high class 
hotels, and shopping malls dedicated to selling designer products 
(even though such stores often seemed virtually empty of shop- 
pers). And there was the lure of international speculation to add 
to the lure of local profiteering. In March 2008 executives of the 
OTIC Group in Beijing were on the verge of signing a deal to buy 
a one billion dollar stake in the US bank Bear Stearns when news 
came through that it had gone bust. 59 

This combination of contradictions meant that a smooth 
upward path of growth was a most unlikely scenario for Chinese 
capitalism. Certainly those charged with managing its economy 
were by no means confident that they could control the tempo of 
competitive accumulation in a way that could avoid unexpected 
catastrophes as managers of enterprises, both private and state 
owned, sought to outdo each other. Or, as Premier Wen Jiabao 
told the National People's Congress in March 2007, "the biggest 
problem with China's economy is that the growth is unstable, un- 
balanced, uncoordinated, and unsustainable". 60 

The unpredictability of the Chinese economy had important im- 
plications for the rest of the world. It had replaced the US as 

The Years of Delusion 


Japan's biggest export market, while it was in turn the second 
biggest exporter to the US (just behind Canada and just ahead of 
Mexico). 61 Its role in importing components from elsewhere in 
East and South East Asia and raw material from Latin America 
and Africa made it central to all their economies. And, most im- 
portantly, the huge receipts from its trade — much of it with the 
US — were deposited in the US. Along with the similar surpluses 
made by Japan and the oil states, it provided the lending which en- 
abled US consumers and the US government to keep borrowing 
until the "credit crunch" of the summer of 2007. Effectively it lent 
money to the US (and to a lesser extent to certain European states 
like Britain) to buy goods it itself made. This added to the appear- 
ance of stability of the world system. 

Yet those who believed Chinese growth could pull the world 
system forward if something went wrong in the US and Europe 
not only forgot that the unbridled markets unleashed in China 
could not lead to stable as opposed to wildly fluctuating growth. 
They also failed to take into account the relatively small weight 
China still had in the world system. In terms of current exchange 
rates, GDP in 2006 was $2,600 billion — just behind Germany, 
just ahead of the UK and less than a fifth of that of either the US 
or the European Union. "Purchasing Power Parity" estimates 
(based on the buying power of incomes in the domestic currency, 
the yuan) seemed much higher, at about 50 percent of US or EU 
GNP according a revised World Bank estimate in 2007. 62 The ex- 
change rate figures considerably underestimate the level of 
resources available for consumption by China's population (since 
domestic prices of basic foodstuffs like rice and basic services like 
urban transport fares cost a quarter or less of those in the West). 
But, it is the exchange rate measurement that is important in de- 
termining the degree to which a country can import and so 
provide a locomotive to pull the rest of the world economy for- 
wards. And it was a grave mistake to believe that China, 
accounting for 4 or 5 percent of global buying power, could some- 
how compensate for the effect of a major economic crisis in much 
of the rest of the world system. 

The Chinese economy was not yet big enough for it to be an al- 
ternative motor for the world system as a whole. But it was big 
enough for its rapid growth to add to the instability of the global 
system, as was shown by the way it added to escalating global in- 
flation in the years up to the summer of 2008. 


The New Age of Global Instability 

India, the NICs and the BRICS 

It became commonplace to bracket India with China as the 
"emerging giants" by the mid-2000s. They had more or less equal 
populations (around 1,300 million), both were nuclear powers 
and both suffered deep rural poverty. But India's real importance 
in the world economy was much less than China's. It was about a 
third of the size in exchange rate terms (considerably smaller in 
fact than Britain or France) and 60 percent smaller in PPP terms; 
its growth rates were only a little above 60 percent of that of 
China in the late 1990s, rising briefly to just less than 90 percent in 
the mid-2000s; its share of total world exports in 2003 was only 
0.7 percent, putting it in 31st position. 63 

There were some parallels with the Chinese pattern: an early at- 
tempt at state-directed industrialisation (the period of so-called 
"Neruvian socialism") was followed by a few years of stagnation in 
the mid and late 1970s; and then the introduction of reforms aimed 
at a much more market based model of accumulation. But there 
were significant differences. Lacking the crude power of the Chinese 
state, India's state and private capitalists were not nearly as success- 
ful in subduing other classes (on the one side the old landowning 
class, on the other the workers and peasants) and so achieved less in 
the period of state-led primitive accumulation when the Indian 
growth rate was probably three quarters of China's. They were 
therefore less able to benefit from a turn to the world market — ex- 
porting less and remaining much less attractive to foreign capital 
than their Chinese competitors. "Reforms" pushed up the rate of ac- 
cumulation, with investment reaching 25 to 30 percent of GNP. But 
this could only be sustained on the basis of a growing portion of 
output accruing to the capitalist class and the upper middle class, at 
the expense of the workers, peasants and the poor. 

As a 2007 report for the IMF showed: 

In the 1990s, the top of the population enjoyed a substantially 
larger share of the gains from economic growth compared to 
the previous decade. This had significant effects on income in- 
equality, which grew within states, across states, and between 
rural and urban areas. 64 

An analysis of income tax data suggests up to 40 percent of growth 
ended up in the hands of the top 1 percent of the population. 65 

The Years of Delusion 


Apologists for capitalism tend to assume rising growth must au- 
tomatically lead to falling poverty and quote various official 
statistics showing a decline in the proportion of people living in 
absolute poverty by 10 percent in the 1990s. But in the same 
decade there was a fall in food consumption per head in the rural 
areas, where two thirds of Indians live. Abhijit Sen, re-analysing 
the official figures, concluded that the total number living in 
poverty probably grew in the 1990s, that the proportion below the 
poverty line only fell very slightly, and this was a "lost decade" in 
terms of fighting poverty. 66 The number below the poverty line in 
2002 was 35 percent of the Indian population, some 364 million 
people. But even this underestimated the degree of suffering. Half 
of all Indian children are clinically undernourished and almost 40 
percent of all Indian adults suffer chronic energy deficiency. 67 Even 
in the supposedly prosperous states of Gujarat, Karnataka, Kerala, 
Maharashtra and Tamil Nadu, "more than 70 percent of the rural 
population consumed less than 2,200 calories per day". 68 

India's insertion into the world system means that industrial 
investment, like that in China, has been overwhelmingly capital- 
intensive, with the capital output rising substantially in the 
1990s. Employment growth was stuck at about 1 percent a year; 
0.87 percent in the "organised" (ie formal) manufacturing 
sector, 69 even if growth was a little faster in the "unorganised" in- 
formal sector where average firm size is less than two people. 70 
Most of the people flooding from the countryside to the cities 
have ended up trying to make a livelihood in the service sector, 
doing unskilled labour at very low levels of productivity in 
return for the 50 rupees ($1) a day needed to just about keep a 
family alive — sweeping and cleaning, working as domestic ser- 
vants, washing clothes, pushing barrows, peddling cycle 
rickshaws, hawking goods, portering, waitering, guarding. The 
much publicised call centres employed only 400,000 people or 
0.008 percent of the country's workforce in 2006. 71 

India's growth, like China's, means that by the mid-2000s it 
represented a much bigger portion of world capitalism than 50 or 
even 20 years earlier, and this had important implications for the 
system as a whole. But it was still quite small by the standards of 
the US or even Japan, Germany and China. This could change if 
the rates of growth of the mid-2000s were sustained for another 
two decades: in dollar terms the Indian economy would end up 
being bigger than the UK. But the most modern centres of indus- 


The New Age of Global Instability 

trial society in Mumbai, Hyderabad or Bangalore would still be 
separated by stretches of rural poverty bigger than most European 
countries. And long before that the whole process of rapid growth 
could be thrown off balance both by internal factors and by the 
impact of instability internationally. 

We have seen what happened to the "tigers" in the late 1990s, 
and before that to the Brazilian "miracle" of the 1960s and 1970s. 
There was therefore a lot of amnesia involved when people lumped 
together a very disparate collection of countries, Brazil, Russia, 
India, China and South Africa (the "BRICS"), and claimed that 
somehow together they represented an alternative driver for the 
world system. In fact, renewed economic growth in Brazil, Russia 
and South Africa depended typically on an upsurge of raw material 
and agricultural prices in a boom which was bound to come to an 
end eventually — and when it did so it would hit them seriously. 

The great minds that extolled the system paid no greater atten- 
tion to these contradictions in their rosy picture of Asia than they 
did to the underlying problems in Europe and North America. 
Japan had problems, they usually recognised, but this was be- 
cause of the lack of wisdom displayed by a government which had 
never really absorbed the lessons about how a free market should 
operate. As late as the autumn of 2007 financial journalists, gov- 
ernment ministers and the stars of academic economics were all 
agreed that capitalism had found a new long-term stability — and 
even some Marxists spoke of a "new long upturn". They were 
soon to look as foolish as those who forecast endless peace in the 
early summer of 1914. 

The Years of Delusion 



Global Capital 
in the New Age 

Bursting through borders 

The decades of the great delusion were decades in which capital 
burst out of national confines in trade, investment and produc- 
tion. By 2007 international trade flows were 30 times greater 
than in 1950, while output was only eight times greater. 1 Foreign 
direct investment shot up: flows of it rising from $37 billion in 
1982 to $1,200 billion in 2006; 2 the cumulative stock of FDI 
rose from 4 percent of world gross domestic product in 1950 
(less than half the 1913 figure) to 36 percent in 2007. 3 The direct 
organisation of production across national boundaries also took 
off in a way that had been very rare in the past and the multina- 
tional corporation became the generally accepted stereotype of 
the big capitalist enterprise. 4 

The movement of finance across national borders, which had 
fallen sharply since the crisis of the 1930s, now grew explosively, 
with governments dropping exchange controls as part of the more 
general process of deregulation. By the mid-1980s the trend was 
for "bankers to map out new strategies which, for most of them", 
amounted "to establishing sizeable presences in the major finan- 
cial centres, London, New York and Tokyo, and some secondary 
ones as well". 5 There was a proliferation of banking mergers. The 
old-established Hong Kong and Shanghai Banking Corporation 
took over one of the "big five" British banks, relocated its head- 
quarters to London and moved on to buy banks in a dozen 
countries. The two big Spanish banks, the Bank of Bilbao and 
Vizcaya, and the Bank of Santander, bought up a very large pro- 
portion of the banking systems of many Latin American countries, 
until they alone owned almost one third of the assets of the 20 


biggest banks, 6 and then branched out into other types of business, 
"investment banking, insurance and in particular participation in 
pension fund management", acquiring "minority shares in some 
non-financial enterprises, basically in sectors where other Spanish 
investors are very active (telecommunications and energy)". 7 

There was a parallel process of concentration of industrial ac- 
tivities across national borders. The huge firms that had emerged 
in the old industrial countries in the previous period, often under 
the tutelage of the state, were now able to dominate not only their 
national market but also carve out huge chunks of the world 
market. Their competitors could only survive if they looked to an 
international mobilisation of resources, that is, if they too became 
multinational, not only when it came to trade but also when it 
came to production. The most successful firms in many key indus- 
tries became those with international development, production 
and marketing strategies, based upon buying up, merging with or 
establishing strategic alliances with firms in other countries. 

In motors, the Japanese car firms established production facili- 
ties in the US, turning out more vehicles than the third biggest 
American firm, Chrysler; the nationalised French firm Renault 
began a series of acquisitions in the US, beginning with the small 
fourth US car firm American Motors; Volvo took over General 
Motors' heavy truck production in the US; Ford and Volkswagen 
merged their car production in Brazil; Nissan built an assembly 
plant in North East England to produce hundreds of thousands of 
cars a year, while Honda bought a 20 percent stake in Rover. In 
tyres, the French firm Michelin made itself the world's biggest pro- 
ducer by taking over Uniroyal-Goodrich in the US in 1988. The 
pattern continued into the 1990s and the early 2000s. Mercedes 
Benz took over Chrysler (before selling it again in 2007); Renault 
formed an "alliance" with Nissan (buying 44.5 percent of it, while 
Nissan bought 15 percent of Renault) with a joint chief executive; 
General Motors bought Saab, took 20 percent stakes in Suzuki, 
Subaru and Fiat, and acquired 42 percent of Daewoo; the Indian 
group Tata took over the Anglo-Dutch steel firm Corus (formed by 
a previous takeover of the privatised British Steel); half of China's 
soaring exports were produced by corporations at least partly 
owned by Western multinationals; Chinese firm AVIC 1 was sup- 
plying the rudder for Boeing's 787 Dreamliner and making bids 
for six auctioned off Airbus plants in Europe; Russia's Aeroflot put 
in a bid for Alitalia. These are just a random sample of the wave of 


The New Age of Global Instability 

international takeovers and collaboration agreements that were re- 
ported by the Financial Times every day. 

If the typical capitalist firm of the 1940s, 1950s or 1960s was 
one which played a dominant role in one national economy, at the 
beginning of the 21st century it was one that operated in a score 
or more countries — not merely selling outside its home country 
but producing there as well. The biggest deployed far more eco- 
nomic resources than many states. "29 of the world's 100 largest 
economic entities are transnational corporations", 8 reported 
UNCTAD. The process of national firms branching out into the 
rest of the world was not confined to the advanced industrial 
countries. It affected the Third World and Newly Industrialising 
Countries where the statification of industry had previously 
tended to go even further than in the West, as we saw in Chapter 
Seven. It intensified with the restructuring of industry that took 
place in each crisis of these years as firms rationalised production, 
shut plants and merged with others. 

Myths and realities 

This whole process was baptised "globalisation" by the 1990s. It 
was bracketed together with neoliberalism as representing a whole 
new phase of capitalism — for enthusiasts a phase very different to 
any previously. They held not only that the world should be organ- 
ised according to the free flows of capital, without any intervention 
by governments, but that this had already come about. 

We lived, it was said, in the age of multinational (or sometimes 
transnational) capital, of firms moving production at will to 
wherever it could be done most cheaply. It was, some influential 
voices insisted, a world of "weightless" production, 9 where com- 
puter software and the internet were much more important than 
"old fashioned metal-bashing" industries, and where the absolute 
mobility of capital had completely detached it from any depen- 
dence on states. This was an integral part of the new economic 
paradigm supposedly unleashing a new dynamism in the after- 
math of the failures of Keynesianism, state direction and Soviet 
style "socialism". "Nationalities of companies" were "becoming 
increasingly irrelevant', declared the British Tory minister 
Kenneth Clark. 10 This was the age of "the stateless corporation", 
declared Business Week. 11 

Global Capital in the New Age 


Many people who rejected the politics of mainstream globalisa- 
tion theory nevertheless accepted many of its assumptions. So 
Viviane Forrester wrote of "the brand new world dominated by 
cybernetics, automation and revolutionary technologies" with "no 
real links with 'the world of work'"; 12 Naomi Klein described "a 
system of footloose factories employing footloose workers"; 13 and 
John Holloway told of capital being able "to move from one side 
of the world to the other within seconds". 14 

The vision of a global system in which states no longer played a 
central part had as its corollary the argument that the wars that 
had plagued most of the 20th century were a thing of the past. The 
world was entering a "new world order", proclaimed George Bush 
senior after the collapse of the Eastern bloc and US victory in the 
first war against Iraq. 15 Francis Fukuyama gave such talk an acad- 
emic gloss with his announcement of "an end to history". 

Even thinkers long associated with the left came to the conclu- 
sion that capital in the new period no longer needed the state, and 
therefore had turned its back on war. Nigel Harris wrote of "the 
weakening of the drive to war", since "as capital and states 
become slightly dissociated, the pressures to world war are slightly 
weakened". 16 Lash and Urry went even further and did not include 
any mention of military expenditure in their account of the "post- 
modern" world of "disorganised capitalism". 17 

Lacking from all these varied assertions about globalisation was 
any real grasp of how the relations between states and capitals 
were really developing. For capitals were no more willing, or able, 
to break their relationships with states than they had been at the 
time of the First World War. Such relationships may have become 
more complex, but they retained their overwhelming importance. 

This should have been most obvious in the case of productive 
capital. It simply could not be as mobile as globalisation theory 
contended. Factories and machinery, mines, docks, offices and so 
on still took years to build up, just as they had in the earlier period 
of capitalism, and could not be simply picked up and carted away. 
Sometimes a firm can move machinery and equipment. But this is 
usually an arduous process and, before it can be operated else- 
where, the firm has to recruit or train a sufficiently skilled 
workforce. In the interim, not only does the investment in the old 
buildings have to be written off, but there is no return on the in- 
vestment in the machinery either. And, few productive processes 
are ever completely self-contained. They are rooted, as we saw in 


The New Age of Global Instability 

Chapter Four, in production complexes, dependent on inputs from 
outside and links to distribution networks. If a firm sets up a car 
plant, it has to ensure there are secure sources of nuts and bolts, 
steel of the right quality, a labour force with the right level of train- 
ing, reliable electricity and water supplies, a trustworthy financial 
system, friendly bankers, and a road and rail network capable of 
shifting its finished products. It has to persuade other people, other 
firms or governments to provide these things, and the process of 
assembling them can take months or even years of bargaining, in- 
volving trial and error as well as forward planning. For this 
reason, when restructuring firms usually prefer the road of "grad- 
ualism" — moving piecemeal from old plant to new, keeping intact 
old supply and distribution networks, minimising the dislocation 
to the "complex" around them. So it took Ford nearly two years 
to implement its decision in 2000 to close down its assembly plant 
in Dagenham and move production elsewhere in Europe. When 
Cadbury Schweppes announced the "rationalisation" of its global 
operation including closures in June 2007, it said it expected it to 
take three years to implement. 

Even with money capital there is no pure mobility. As Suzanne 
de Brunhoff noted: 

Even though huge financial flows of mobile capital are daily cir- 
culating round the globe, a global single market of capital does 
not exist. There is no single world rate of interest and there are 
no single world prices for produced goods... Financial assets 
are denominated in different currencies which are not "perfect 
substitutes". 18 

Professor Dick Bryan made a similar point: 

International finance provides a clear illustration of the cen- 
trality of nationality within global accumulation. The 
combination of satellite and computer technology has pro- 
vided... all the technical preconditions for the neoclassical 
"perfect market" of financial flows to equalise rates of return, 
transcending national boundaries. Yet... finance maintains na- 
tional characteristics. It does not move systematically so as to 
equalise savings and investment... A global financial system 
comprised of nationally-designated currencies signals that 
globalisation cannot be devoid of a national dimension. 19 

Global Capital in the New Age 


Every year UNCTAD provides a list of the top 100 multinationals 
and their "transnationality index" — the proportion of their sales, 
assets and investments which are located outside their "home" 
country. These figures are sometimes said to show how little multi- 
nationals depend on a national base. But in fact they can be looked 
at another way. In 2003 the top 50 multinationals still relied on their 
home base for over half their business. And the 20 with the highest 
ratios of foreign sales were mostly from small, open economies such 
as Canada, Australia and Switzerland, or are members of the EU 
such as Finland, France, the UK, Germany and Sweden whose sales 
are oriented to close neighbours. None of the US multinationals fig- 
ured in the list of the most international global firms. 20 

Average Transnationality of the world's largest transnational corporations 

(TNCs) 2003 

Top 100 TNCs 


Top 50 TNCs 


Those based in 

United States 


United Kingdom 








Small European countries 


The proliferation of cross-border mergers did not mean that they 
represented the only, or even the dominant form of restructuring. 
They counted for only a quarter of all mergers 21 — and many were 
unsuccessful. 22 And only a small portion of global investment was 
across national borders. Tim Koechlin showed that although the 
stock of American FDI had "grown quite dramatically", from "$32 
billion in 1960 to $2,063 billion in 2004", this represented "a rel- 
atively small share of all US investment", with the ratio of foreign 
direct investment outflows to all investment at only 7.3 percent". 23 
For manufacturing, the ratio was higher, at 20.7 percent — "but was 
down on the figure of 35.4 percent in 1994". 24 He concludes, 
"Although the investment process has become increasingly 
'global'... capital accumulation remains an essentially national phe- 
nomenon" . 25 What is more, foreign direct investment figures gave 
an exaggerated impression of the mobility of productive capacity, 


The New Age of Global Instability 

rather than of the ownership of it. UNCTAD figures bore out a 
point Riccardo Bellofiore made at the end of the 1990s. Foreign in- 
vestment mostly involved buying up existing enterprises, not new 
ones, so that: 

FDI flows in manufacturing are dominated by mergers and 
acquisitions. ..rather than by the creation of new capacity: 
and a big share of FDI is in non-productive, speculative and 
financial ventures. 26 

Most multinationals concentrated their investments in a particular 
advanced industrial country and its neighbours, and then relied on 
the sheer scale of investment, research and development, and pro- 
duction there to provide an advantage over all competitors. The 
foreign investment that did take place was not necessarily "global" 
in its character. "Sixty-six percent of the output of US foreign affil- 
iates" was "sold locally", that is, within the boundaries of the 
particular country in which a particular affiliate was based. 27 

This was a trend which broke with the predominantly national 
basis of production without, however, turning into the global pro- 
duction stereotype. A multinational could seek to overcome 
obstacles to exporting to a particular country by establishing 
plants inside its borders — in a pattern which Ruigrok and van 
Tulder called glocalisation. 28 Even if it started off with "screw- 
driver plants" devoted simply to assembling components imported 
from the multinational's home country, it often ended up turning 
to local firms to provide components. The multinational gained 
because local firms effectively became its satellites, supplying it 
with resources and fighting for its interests against its local or re- 
gional competitors. It might even welcome protectionist measures 
by the state its subsidiary was in, since that would protect its sales 
there from international competitors. 

Globalisation theorists failed to recognise such developments. 
Yet they often tried to bolster their own case by referring to in- 
vestments like those of Japanese motor companies in the US and 
Britain which were precisely along these lines. Similarly, they 
stressed the "flexible production" characteristic, for instance, of 
part of the Italian knitwear industry, and "just in time" produc- 
tion methods pioneered in Japan as typical of globalisation, 
although, as Michael Mann quite correctly noted, both implied lo- 
calised or regional, rather than global, production. 29 

Global Capital in the New Age 


The "outsourcing" overseas by advanced country firms of par- 
ticular parts of their production processes became an important 
phenomenon, but it was still a much more limited one than was 
widely believed. At the beginning of the 2000s, imported "material 
inputs" (including raw materials) accounted for 17.3 percent of 
total US output. 30 Koechlin estimated that "outsourcing" accounted 
"for somewhat less than 4.8 percent of US gross domestic purchases 
and somewhat less than 9 percent of apparent consumption of man- 
ufactured goods". 31 Another study showed that the fall in "payroll 
employment in manufacturing" in the early 2000s had "not been 
caused by a flood of imports of either goods or services" but was: 

primarily the result of inadequate growth of domestic demand in 
the presence of strong productivity growth... To the extent that 
trade did cause a loss of manufacturing jobs it was the weakness 
of US exports after 2000 and not imports that was responsible. 32 

The different configurations of global capital 

Not only did the popular globalisation accounts overstate the 
degree of mobility of capital, they also provided a much distorted 
view of what that mobility involves. Alan M Rugman pointed out 
that of the big multinationals: 

Very few are "global" firms, with a "global" strategy, defined as 
the ability to sell the same products and/or services around the 
world. Instead, nearly all the top 500 firms are regionally based 
in their home region of the "triad" of North America, the EU, 
or Asia... 33 

Half of most global firms were still operating mainly in their 
home region market at the beginning of the 2000s — including 
Vivendi, Pernod Ricard, Thomson Corporation, Stora Enso and 
Akzo Nobel, Volvo, ABB and Philips. Only six multinationals op- 
erated in anything like a balanced way across at least three 
continents — Nestle, Holcim, Roche, Unilever, Diageo and British 
American Tobacco. 34 Most foreign-owned firms operating in 
European Union countries were based in other EU countries, 
where the predominant form of multinational ownership was "re- 
gional", not global, with "US-controlled firms responsible for 


The New Age of Global Instability 

only 4.5 percent of European value added". 35 

Research economists Georgios Chortareas and Theodore 
Pelagidis concluded in 2004: 

The increase in international trade flows is predominantly con- 
fined within the three developed trade blocs of the global 
economy (the USA, the EU, Asia-Japan). A large part of the 
world continues to be excluded from the trade boom. The 
emerging reality is more a process of deepening regional inte- 
gration (regionalisation) of particular groups/blocs of countries 
rather than a global increase in cross-border trade flows and 
production interdependence. 36 

"Trade", they argued, "has not come to be spread over a wider 
range of countries, even compared with the past. It is enough to 
recall that developed countries' imports from developing countries 
are still only about 2 percent of the combined GDP of the 
OECD". 37 Their one exception was East Asia, which will have 
grown more important after their research at the turn of the cen- 
tury — by 2005 Chinese exports had expanded to reach to over 7 
percent of the global total. 

Investment flows were similarly concentrated within the "triad" 
of North America, Europe and Japan. In 2002-4 FDI flows into 
the European Union averaged about $300 billion a year. The total 
for the rest of the world — the "developing countries" — was only 
$180 billion, of which China (including Hong Kong) took two 
fifths, and Brazil and Mexico a fifth. Some 89 percent of the cu- 
mulative stock of FDI worldwide in 2004 was in the developed 
economies (roughly the same proportion as in 1990), and two 
thirds of that was in Europe. 38 

The pattern was not one of capital flowing effortlessly over a 
homogenous worldwide landscape. It was "lumpy", concentrated 
in some countries and regions, in a way that was not fully grasped 
by either the crude globalisation view, by interpretations that 
stressed regional blocs, or by those who still spoke solely in terms 
of national economies. The empirical material could be looked at 
in different ways — just as a bottle can be seen as half full or half 
empty. But the reality of capitalism was that it could not be re- 
duced to any one of these facets. 

Different firms operated at different levels. Some, the major- 
ity in simple numerical terms, still operated within national 

Global Capital in the New Age 


economies from which they put out tentacles to see what they 
could gain by buying and selling to their neighbours. Others, 
smaller in number but enormously powerful, increasingly oper- 
ated on a regional basis and reached out to pick up what they 
could elsewhere in the world. And a small minority saw their 
future in genuinely global terms. As capitals with each perspec- 
tive bought and sold, manoeuvred to expand markets, searched 
for cheaper inputs and for more profitable places for invest- 
ment, they both influenced each other and tripped over each 
other. The outcome was not some new model, but an ever shift- 
ing, kaleidoscopic pattern which was upset every time it seemed 
about to attain some fixity. "All that is solid" did "melt into 
air" as Marx had put it — but not in the way the crude globali- 
sation theory held. For capital's old companion, the state, 
entered into the process at every point. 

States and capitals in the era of "globalisation" 

All the advanced capitalist states still maintain historically very 
high levels of state expenditure, only surpassed historically during 
the time of total war. And although business often complains 
about the level of taxation, it never seriously suggests going back 
to the level of expenditure of a century ago. The reason is that cap- 
itals today, far from not needing states, require them as much 
as — if not more than — ever before. 

They need them first because the continued concentration of 
capitals, in particular geographical locations, necessitates facilities 
that are not automatically provided by the operation of the 
market: police; judicial systems; a framework to limit the defraud- 
ing of some capitals by others; at least minimal regulation of the 
credit system; the provision of a more or less stable currency. 
Along with these they also need some of the functions fulfilled by 
the state during the period of the state-directed economy: regula- 
tion of the labour market; ensuring the reproduction of the next 
generation of labour power; the provision of an infrastructure for 
transport, communications, water and power; the supply of mili- 
tary contracts. Even the big multinationals, with half or more of 
their production and sales located abroad, still rely for much of 
their basic profitability on their operations in their home base, and 
therefore on what a state can provide for them. 


The New Age of Global Instability 

Along with these functions there is continued massive sup- 
port by any state for its capital's domestic accumulation — and 
this was true long before the most recent turn to Keynesianism. 
So the Pentagon played a key role in resuscitating the American 
microchip industry in the late 1980s by putting pressure on 
firms to merge, to invest and to innovate 39 — and received strong 
industrial support: 

"In today's global economy some central vision is required", 
Hackworth of Cirus Logic explained. "Somebody has to have an 
industrial strategy for this country", agreed LSI Logic's Corrigan. 40 

The result of that strategy was that by the end of the 1990s the 
world's top semiconductor company was no longer NEC 
(Japanese) but Intel (American), with Motorola and Texas 
Instruments (both American) in third and fifth position. The US 
state also managed to bring about a similar rationalisation of the 
US aerospace industry, culminating in the merger of Boeing and 
McDonnell Douglas into a firm that controlled 60 percent of 
global civil aircraft sales, and a turnover in military aircraft pro- 
duction twice as great as the whole of the European industry. As 
the New York Times put it, "President Bill Clinton's administra- 
tion" had "largely succeeded in turning America's military 
contractors into instruments of making the economy more com- 
petitive globally". 41 

The internationalisation of firms' operations, far from leading 
to less dependence on state support, increases it in one very im- 
portant respect. They need protection for their global interests. A 
whole range of things become more important to them than in the 
early post-war decades: trade negotiations for access to new mar- 
kets; exchange rates between currencies; the allocation of 
contracts by foreign governments; protection against expropria- 
tion of foreign assets; the defence of intellectual property rights; 
enforcement of foreign debt repayments. There is no world state 
to undertake such tasks. And so the power of any national state to 
force others to respect the interests of capitals based within it has 
become more important, not less. 

Floating exchange rates between major currencies mean that the 
capacity of a government to influence the value of its own currency 
can have an enormous effect on the international competitiveness of 
firms operating within its boundaries. This was shown, for instance, 

Global Capital in the New Age 


by the "Plaza Accord" of 1985, when the US persuaded the 
European and Japanese governments to cooperate with it in forcing 
up the value of the yen against the dollar. In the aftermath sales of 
US firms internationally "grew at their fastest rate during the post- 
war period, shooting up at an annual rate of 10.6 percent between 
1985 and 1990". 42 It was shown again when the political decision 
of the government brought to office in the aftermath of the 
Argentinian uprising of December 2001 to devalue the currency by 
75 percent gave a considerable boost to the industrial and agrarian 
capitals based in the country. 43 

A change in the exchange rate alters the amount of global value 
which a firm operating within a national economy gets in return 
for the labour it has used in producing commodities. As Dick 
Bryan has put it: 

The exchange rate is a critical determinant of the distribution of 
surplus value amongst capitals... Because nation-states are 
deemed responsible for the global commensurability of "their" 
currency, globalisation... is not about eradicating the national 
dimension of accumulation. Indeed, globalisation is not even 
about the national dimension "hanging on" in a process of slow 
dissolution. Global accumulation is actually reproducing the 
national dimension, albeit in ways different to past eras. 44 

Again the same centrality of states is shown in international trade 
negotiations conducted through the WTO. They gather as the rep- 
resentatives of the capitals clustered together within their borders. 
Different firms have different interests and will look to the indi- 
vidual states over which they have influence to achieve these. This 
is just as true of firms who look to establishing global domination 
through free trade as of those with protectionist inclinations. All 
are dependent upon "their" state to persuade other states to let 
them get their way. So the US state is an essential weapon for firms 
like Microsoft, GlaxoSmithKlein or Monsanto in getting the enor- 
mous royalty payments that accrue from world recognition of 
their intellectual copyrights. Likewise the financial power it exer- 
cises through the IMF and the World Bank has safeguarded the 
foreign loans made by American banks — and has helped US-based 
industrial corporations gain from the crises facing smaller states, 
as when Ford and General Motors gained control of two of the 
Korean car companies at the time of the Asian crisis. 45 


The New Age of Global Instability 

Neither do international mergers show that the importance of 
states is declining. Part of their rationale is for a multinational to 
be able to extend its influence from its home state to other states. 
US and Japanese firms invest in West European countries so as to 
be able to "jump" national boundaries and so influence the policy 
of these states and the European Community from within: hence 
the spectacle in the early 1990s of US multinationals like Ford and 
General Motors lobbying European governments for measures to 
restrict the import of Japanese cars; hence also the sight of 
Japanese car firms negotiating for subsidies from the British state 
to set up car assembly plants. The giant company does not end its 
link with the state, but rather multiplies the number of states — and 
national capitalist networks — to which it is linked. 

The continued importance of such connections is shown most 
vividly during financial and economic crises. For states alone can 
marshal the resources to stop a giant firm or bank going bust — and 
pulling down with it whole industrial or financial complexes. The 
history of such crises since the early 1970s has been a history of 
states bailing out stricken corporations or putting pressure on 
some firms for "lifeboat operations" to keep others afloat. Because 
the period of globalisation has been one of much greater crises 
than the post-war decades, the reliance of corporations on gov- 
ernments for such rescues has been much greater. As we will see in 
the next chapter, the transformation of the credit crunch of 2007 
into the great banking crash of 2008 showed how great that re- 
liance had become. 

The overall conclusion has to be that corporations, whether 
multinational or other, do not regard a state which will defend 
their interests as some afterthought based on nostalgia for the 
past, but an urgent necessity flowing from their present day com- 
petitive situation. 

The successor to the state capitalism of the mid-20th century 
has not been some non-state capitalism but rather a system in 
which capitals rely on "their" state as much as ever, but try to 
spread out beyond it to form links with capitals tied to other 
states. In the process, the system as a whole has become more 
chaotic. It is not as if individual firms have simple demands that 
they merely put on individual states. As a firm operates interna- 
tionally, one of its divisions can establish relations with a 
particular state and its associated complex of capitals, even while 
other divisions of the same firm can be establishing other relations 

Global Capital in the New Age 


with other states and their complexes of capital. And particular 
state apparatuses can lose a lot of cohesion as their parts try to 
cope with the demands of different, competing capitals. The global 
agenda, the regional agenda, the national agenda and, in the cases 
of the larger states, the sub-national agenda (of particular localised 
geographical complexes of capital) clash with each other, produc- 
ing frictions — on occasions deep schisms — within the national 
political-economic structure. This was what occurred during the 
very long crisis inside Britain's traditional ruling class party, the 
Tories, through the 1990s and early 2000s: its feuds reflected a 
clash between those who saw British capitalism's future as tied to 
the US and those who saw it as dependent on integration into 
Europe (a clash which itself reflected British capitalism's position 
having the majority of its trade with Europe, but half its overseas 
investment in the US). 

Those who see the national states as archaic hangovers from the 
past often speak of the emergence of an "international capitalist 
class" which will have as its correlate an "international capitalist 
state". 46 They fail to take seriously Marx's point that once "it is no 
longer a question of sharing profits, but of sharing losses... practi- 
cal brotherhood of the capitalist class... transforms itself into a 
fight of hostile brothers", the outcome of which is "decided by 
power and craftiness". 47 And when it comes to the use of power, 
the national state is an instrument ready to hand. Interstate con- 
flict, to a lesser or greater degree, is an inevitable outcome once 
economic competition becomes a matter of life and death for giant 
corporations. This is just as true today as in the time of Lenin and 
Bukharin, even if the interconnectedness of national, regional and 
global circuits of capital accumulation impacts on how the instru- 
ment is used. 

Such applications of pressure by states on other states still re- 
quires the deployment of large "bodies of armed men", backed up 
by prodigious expenditure on military hardware — alongside such 
"non-violent" methods as economic aid, trade embargoes, offers of 
privileged trading relationships and crude bribery. Much of the time 
the role can be passive rather than active. The force that sustains a 
certain level of influence does not need to be used so long as no one 
dares to challenge it — as with the Mutually Assured Destruction 
(MAD) doctrine between the USSR and the US which prevented 
either moving into the other's European spheres of influence during 
the Cold War. Again force can play an indirect rather than a direct 


The New Age of Global Instability 

role as with the implicit US threat to the West European powers and 
Japan not to help them militarily during the Cold War years unless 
they acceded to US objectives. But the violence of the state remained 
a vital background factor in such cases. In this lies the continuity 
with the imperialism analysed by Lenin and Bukharin. Even today 
the rulers of Russia, China, India, Pakistan and North Korea — and 
for that matter Britain, France and the US — see possession of nu- 
clear weapons as the ultimate defence against enemies. 

The interaction between the great powers is not the peaceful 
concert of nations dreamt of by certain apostles of neoliberalism 
and free trade. There are contradictory interests, with military 
force a weapon of last resort for dealing with them. But there is 
still a difference with the first four decades of the 20th century. 
These culminated in wars which ravaged the heartlands of the 
great powers. Tensions since 1945 have led to massive accumula- 
tions of arms that could potentially be unleashed against the 
heartlands. But hot wars have been fought outside them, usually 
in the Third World. 

One reason for this has been the "deterrent" effect, the fear that 
waging war on a nuclear power will lead to destruction of the 
whole domestic economy as well as most of its people. Another 
has been the very interpenetration of the advanced capitalist 
economies that puts pressure on states to exercise power outside 
their own boundaries. Few capitalists want their national state to 
destroy huge chunks of their property in other states — and most of 
it will be in other advanced capitalist countries. 

This does not rule out war completely. The capitalist economy 
was highly internationalised in 1914, but this did not prevent all- 
out war. Again, in 1941, the presence of Ford factories and 
Coca-Cola outlets in Germany did not stop a US declaration of 
war after Pearl Harbor. But it does provide them with an incen- 
tive to avoid such conflicts if they can — and to settle their 
differences in less industrialised parts of the world. Hence the 
years since 1945 have been marked by war after war, but away 
from Western Europe, North America and Japan. And often the 
wars have been "proxy wars" involving local regimes to a greater 
or lesser extent beholden to, but not completely dependent on, 
particular great powers. 

This was the logic which led the US in the 1980s to give tacit 
support to Iraq in its long war against Iran and to provide modern 
weaponry to the Mujahadin fighting the Russian occupation of 

Global Capital in the New Age 


Afghanistan. A similar logic worked itself out in the Balkans in the 
1990s, when Austria's attempt to gain from Slovenian indepen- 
dence from Yugoslavia led to Germany encouraging Croatian 
independence and then the US Bosnian independence, even though 
the result was bound to be bitter ethnic conflict. 

The worst suffering from proxy wars has probably been in 
Africa. During the last decade and a half of the Cold War the US 
and the USSR backed rival sides in wars and civil wars as part of 
their attempts to gain a strategic advantage over each other. In the 
1990s the US and France vied for influence in Central Africa. 
They backed rival sides in the war cum civil war that broke out in 
the border regions of Tanzania, Rwanda, Burundi and Congo- 
Zaire. They helped set in motion a catastrophe resulting overall 
in 3 or 4 million dead. In such situations freelance armies emerged 
whose commanders emulated the great imperial powers on a 
small scale by waging war in order to enrich themselves, and en- 
riching themselves in order further to wage war. Imperialism 
meant encouragement to local rulers to engage in the bloodiest of 
wars and civil wars — and then occasionally the sending in of 
Western troops to enforce "peacekeeping" when the disorder 
reached such a scale as to threaten to damage Western interests. 
Contradictions which arise from the inter-imperialist antago- 
nisms of the advanced capitalist states in this way wreak their 
worst havoc in the poorer parts of the world. 

From the new period of crisis to the new imperialism 

The pattern of the old imperialism was one of coalitions of states 
with comparable levels of economic and/or military capacity con- 
fronting each other. Today there is great unevenness even between 
the biggest states when it comes to their capacity to advance the 
interests of their domestically based capitals. At the top of the hi- 
erarchy is the state which has the greatest capacity for getting its 
way, the US. At the bottom are very weak states, hoping to be able 
to beg favours off those above them. The states in the middle al- 
ternatively squabble with each other over their position in the 
global pecking order and form ad hoc alliances in the hope of forc- 
ing concessions from those above them. 

This cannot be a stable hierarchy. The unevenness in rates of eco- 
nomic growth (or sometimes contraction) in a period of recurrent 


The New Age of Global Instability 

crises means that the balance of forces between the different 
states is always changing, leading to rival displays of might be- 
tween those who want to advance up the hierarchy and those 
who want to keep them in their place. Weak states get entangled 
in conflicts with neighbours which draw in powerful states to 
which they are allied, while powerful states see exemplary inter- 
ventions in weak "rogue" states as a way of gaining advantage 
over other strong states. 

The greatest source of instability has come from the attempts of 
the US to permanently cement its position at the front of the global 
pecking order. This seemed unassailable at the end of the Second 
World War. But in the decades that followed the US feared succes- 
sive challenges from other states which were growing much more 
rapidly than it was. Russia was seen as an economic (as well as 
military) threat in the 1950s, however absurd that might seem 
today, Japan in the 1980s, and more recently China. The determi- 
nation of the US state not to risk losing its position explains its 
massive levels of arms expenditure and the wars it has waged in 
the Global South. 

The scale of the problems it faced first began to hit home in 
the late 1960s when the US ruling class found it could not afford 
the escalating cost of trying to achieve all-out victory in Vietnam. 
The history of US capitalism since has been very much a history 
of its attempts to restore its old position, amid a world marked 
by repeated economic crises and generally declining rates of ac- 
cumulation. Its attempts have involved alternating phases of 
reducing arms spending as a proportion of total output in an 
effort to ease economic difficulties (from the late 1960s to the 
late 1970s, and from the late 1980s to 2000), and of increasing it 
in the belief that this could boost US global power and the per- 
formance of particular US corporations (in the early and 
mid-1980s and 2000-8). In all the phases the US state made some 
gains for the capitals based in it. In none of them were the gains 
sufficient fully to offset its long-term relative decline. 

The collapse of the military challenge from the USSR and the 
economic challenge from Japan might have been expected to re- 
store the confidence of the US ruling class in its global power in the 
1990s. But its strategists had worries about the future. They rea- 
soned that without the fear of the USSR to keep them in line, the 
European powers were more likely to resist US demands than in 
the past — as was shown by very hard bargaining at World Trade 

Global Capital in the New Age 


Organisation sessions. And in the East, Chinese growth was re- 
placing the older challenge from Japan. Writing in 1994, Henry 
Kissinger expressed his unease: 

The US is actually in no better position to dictate the global 
agenda unilaterally than it was at the beginning of the Cold 
War... The United States will face economic competition of a 
kind it never experienced during the Cold War... China is on 
the road to superpower status... China's GNP will approach 
that of the US by the end of the second decade of the 21st cen- 
tury. Long before that China's shadow will fall over Asia. 48 

What is more, a quarter of a century of growing internationalisa- 
tion of finance, investment, trade and production made US 
capitalism vulnerable to events beyond its borders. Its great multi- 
national corporations needed some policy which would enable the 
might of the US state to exercise control over such events. Already 
towards the end of the Clinton Administration there were moves 
towards a more aggressive foreign policy designed to achieve this, 
with the push to expand NATO into Eastern Europe, but this did 
not go far enough for a group of Republican politicians, business- 
men and academics — the infamous neoconservative "Project for a 
New American Century" formed in the late 1990s. Their starting 
point was the insistence that the way to stop "a decline in American 
power" was a return to a "Reaganite" policy based on large in- 
creases in defence spending, the building of a missile defence 
system, and action to deal with "threats" from "dictatorships" in 
China, Serbia, Iraq, Iran and North Korea. 49 "Having led the West 
to victory in the Cold War, America faces an opportunity and a 
challenge. We are in danger of squandering the opportunity and 
failing the challenge". 50 

The Republican electoral victory of 2000 and then the national 
panic caused by the 9/11 destruction of the World Trade Centre 
gave them a chance to implement their policy. 

It amounted in practice to further building up the military 
might of the US — and then using it to assert US global dominance 
against all comers. Increased arms spending and massive tax cuts 
for the rich were meant to pull the US out of recession, just as the 
"military Keynesianism" of Reagan had two decades before. 
Increased arms spending would lead to recovery from recession, 
to further military handouts to finance technical advances for 


The New Age of Global Instability 

computer, software or aviation corporations, and to an increased 
capacity to dictate policies to other ruling classes — and all paid 
for by even bigger investment flows into the US as it demonstrated 
its overriding power. The aim was for the US to more than com- 
pensate for losing its old lead in market competition by using the 
one thing it has that the other powers do not — overwhelming mil- 
itary might. It was an updated version of the logic of imperialism 
as described by Bukharin in the early 1920s, with the difference 
that the rival capitalist states were not going to be forced into sub- 
servience by wars directly against them, but by the display of the 
US's capacity to wield global power through wars it and its client 
states waged in the Global South. 

Hence the attack on Afghanistan and then, 18 months later, on 
Iraq. The "neocons" believed they had a perfect opportunity to 
demonstrate the sheer level of US military power and to increase 
control over the world's number one raw material, oil. This 
would weaken the bargaining power of the West European states, 
Japan and China, since they would be at least partially dependent 
on the US for their supplies. The assumption was that the wars 
would be won by little more than a display of US airpower at very 
little cost. This seemed a viable way for achieving shared goals to 
those who ran US-based corporations, and the Democrats in 
Congress voted for war. 

It was a gamble and by the spring of 2004 it was clear that the 
gamble was going seriously wrong. The US had taken control of 
Kabul and Baghdad easily enough. But its forces on the ground 
were not able to prevent the growth of resistance in Iraq — and of 
growing Iranian influence there. Within another two years it also 
faced serious resistance from a resurgent Taliban in Afghanistan. 

The turn to military Keynesianism seemed at first to be successful 
in economic terms. There was an unexpectedly quick recovery from 
the recession of 2001-2: "Official military expenditures for 2001- 
2005 averaged 42 percent of gross non-residential private 
investment" and "official figures... excluded much that should be in- 
cluded in military spending". 51 All this provided markets, in the 
short term, for sections of US industry. But the high levels of military 
expenditure soon showed the same negative effects they had shown 
at the time of the Vietnam War and under the Reagan administra- 
tions. They increased economic demand without increasing overall 
international competitiveness and so caused ballooning trade as well 
as budget deficits. By 2006 the combination of escalating military 

Global Capital in the New Age 


costs and the risk of defeat in Iraq was worrying important sections 
of the ruling class. A 2006 report from the Iraq Study Group, 
headed by Republican Party heavyweight James Baker and 
Democratic Party heavyweight Lee Hamilton, bemoaned the loss of 
"blood and treasure" with an estimate of the costs to US capitalism 
of the Iraq venture of a massive £1,000 billion (equal to seven 
months output from the British economy). 52 

Meanwhile other states — and the capitals operating from 
them — were able to take advantage of the US's perceived weakness 
to advance their own positions. The most important West 
European states, France and Germany, had refused to back the 
2003 Iraq War, unlike the first Iraq War of 1991. The French state 
in particular saw a weakening of US influence in the Middle East 
as an opportunity to advance the interests of French capital in re- 
gions where its interests clashed with the US's. China was able to 
benefit from the US entanglement in Iraq and Afghanistan to 
expand its own influence, particularly in Africa and Latin 
America. This went hand in hand with growing trade links, as it 
looked to mineral imports from Africa and agricultural imports 
from Brazil, Argentina and Chile. Soon Russia too was flexing its 
rather weaker muscles, as increased oil revenue allowed it to re- 
cover from the economic collapse of the previous decades and to 
exert pressure on some of the other former Soviet republics; Iran 
took advantage of the US's setbacks to increase its leverage in Iraq 
and Lebanon; the BRICS formed an ad hoc alliance to advance 
their common trade interests in opposition to both the US and the 
EU, so paralysing the Doha round of trade negotiations from 
which US corporations had hoped to get even easier access to for- 
eign markets. The US discovered that when three of its client states 
launched wars for objects it supported — Israel in Lebanon in 
2006, Ethiopia in Somalia in 2007, Georgia against Ossetia in 
2008 — it was not in a situation to stop them facing defeat. 

Commentators who had not long before insisted the collapse 
of the USSR had created a "unipolar world" with one super- 
power were beginning to talk about "multipolarity", with the US 
only able to get its way by making concessions to other powers. 
Some thought this meant a more peaceable world. But the multi- 
polarity is a world of states and their associated capitals which 
have different interests and are out to impose them on the others 
when they get the chance. It is the multipolarity in which old im- 
perialist imperatives are strengthened just as it becomes more 


The New Age of Global Instability 

difficult for them to be successful. It is a world, in short, beset by 
a multitude of contradictory pressures and compelled, therefore, 
to experience one convulsive political crisis after another. This 
became clear when the great economic delusion gave way to a 
great economic crisis. 

Global Capital in the New Age 



Financialisation and 
the Bubbles That Burst 

Credit crunched 

The mood was one of "exuberant optimism", as the world business 
elite gathered in the Swiss resort of Davos in January 2007 to 
"enjoy" what the Financial Times called "the opportunities 
brought about by globalisation, new technologies and a world 
economy that is expanding at its fastest pace for decades". 1 The 
mood was rather different at their next gathering in January 2008. 
There was "grim determination" 2 — grim because the global finan- 
cial system had begun to grind to a halt with a "credit crunch"; 
determination because the "real economy" was still expanding 
and it seemed that appropriate government action would get the 
banks lending again. 

Governments took action in the months that followed. In 
January central banks slashed interest rates. In February the 
British government nationalised the mortgage bank Northern 
Rock; in March the US Federal Reserve provided $30 billion for J 
P Morgan Chase to take over the failing Bear Stearns bank; in 
April and May central banks on both sides of the Atlantic pro- 
vided hundreds of billions to the banks to keep them going, and in 
July they provided hundreds of billions more; early in September 
the US government took over the giant mortgage lenders Fannie 
Mae and Freddy Mac in what the former government adviser 
Nouriel Roubini described as "the biggest nationalisation human- 
ity has ever known". 3 

It was all to no avail. The collapse of one of the pillars of the 
US's financial system, the investment bank Lehman Brothers, on 
15 September caused what was generally called a "financial 
tsunami". Bank after bank in country after country came close to 


collapse and had to be rescued by government bail-outs that cost 
further hundreds of billions and often involved partial nationali- 
sation. The credit crunch had become the most serious financial 
crisis the global system had known since the slump of the 1930s. 
By end of the year it was clear to everyone that it was more than 
just a financial crisis. Tens of thousands of jobs were being lost 
every day in all the major economies; world trade was falling at an 
annualised rate of 40 percent, and the IMF was predicting "the 
sharpest recession since the Second World War for the rich coun- 
tries". 4 But it was not only the rich countries which were affected. 
South Korea, Malaysia, Thailand and Singapore suffered sharp 
economic contraction; 20 million Chinese workers lost their jobs 
as its exports fell and its real estate bubble collapsed; Russian min- 
isters began to fear a new crisis; Brazil's industrial output started 
falling; the economic recovery of Eastern Europe came to a sudden 
halt as millions of people found they could not keep up with their 
mortgage payments to West European banks. At Davos in January 
2009 there were "ever more doom-laden prognoses". 5 

The rise of finance 

The crisis followed a quarter of a century in which finance had 
grown on a massive scale to play an unprecedented role in the 
system. The stock market valuation of US financial companies was 
29 percent of the value of non-financials in 2004, a fourfold in- 
crease over the previous 25 years; 6 the ratio of financial 
corporations' to non-financial corporations' profits had risen from 
about 6 percent in the early 1950s through the early 1960s to 
around 26 percent in 2001; 7 global financial assets were equal to 
316 percent of annual world output in 2005, as against only 109 
percent in 1980; 8 household debt in the US was 127 percent of 
total personal income in 2006 as against only 36 percent in 1952, 
around 60 percent in the late 1960s and 100 percent in 2000. 9 

The growing role of finance had its impact throughout the 
global economy. Every upturn in the recession-boom cycle after 
the early 1980s was accompanied by financial speculation, caus- 
ing massive rises in the US and British stock markets in the 
mid-1980s and mid-1990s, the huge upsurge of Japanese share 
and real estate prices in the late 1980s, the dotcom boom of the 
late 1990s, and the housing booms in the US and much of Europe 


The New Age of Global Instability 

in the early and mid-2000s. Along with these went successive 
waves of takeovers and mergers of giant companies, financed by 
credit, from the buyouts of firms like RBS Nabisco in the late 
1980s through to the wave of takeovers of old-established compa- 
nies by private equity funds in the mid-2000s. 

Meanwhile general levels of indebtedness tended to grow for 
governments, non-financial corporations and consumers alike, as 
bank lending rose much more rapidly in most parts of the world 
economy than did productive output. It doubled in the US and tre- 
bled in Japan in the 1980s; the US boom of the mid-90s was 
accompanied by an extraordinarily high level of borrowing by 
firms and consumers; the housing and property booms of the mid- 
2000s were similarly sustained by massive borrowing in the US, 
Britain, Spain and Ireland. 

The impact of finance on the less industrialised countries was al- 
ready very marked by the 1980s. The loans of the late 1970s had 
created a never ending dependence on further borrowing from fi- 
nancial institutions in order to keep servicing existing debt. By 
2003 the total external debt of sub-Saharan Africa stood at $213.4 
billion, that of Latin America and the Caribbean at $779.6 billion, 
and of the South as a whole at $2,500 billion. 10 

Overall the role played by finance within the system was much 
greater than in either the depression years of the 1930s or the 
boom years of the early post-war decades. In those decades the 
banks had certainly not played the central role Hilferding had as- 
cribed to them at the beginning of the century with his concept of 
"finance capitalism" (see Chapter Four). In the US the big indus- 
trial corporations relied on their own internally generated 
revenues for investment funds; in Japan and Germany the banks 
played a greater part, but it was one of aiding the expansion of 
favoured sections of industrial capital. It was with the ending of 
the long boom that finance seemed to break the bonds that had 
bound and subordinated it to industrial capital. By the 1980s 
funds worth billions — and later hundreds of billions — of dollars 
were moving into and out of economic sectors and particular 
countries, cherry picking the most profitable outlets for investment 
before moving on elsewhere, often leaving economic devastation 
in their wake. 

Finance began to impact directly on the lives of the world's 
workers in a way in which it had not previously. Most people until 
the 1980s were paid wages in cash every week; now the norm was 

Financialisation and the Bubbles That Burst 


payment into bank accounts. The spread of home purchase in 
countries like Britain or the US from a third to two thirds of house- 
holds provided a new destination for lending — and the diversion 
of part of wages and salaries into interest repayments. Insurance 
and private pension schemes likewise spread the tentacles of fi- 
nance into wider sections of the population than ever before. 
Credit in the form of mortgages and hire purchase agreement was 
already important in the 1930s, but it was only in the 1980s that 
indebtedness began to become central in maintaining people's reg- 
ular living standards. For the majority of workers in the US or 
Britain, the mortgage and the credit card became part of everyday 
life, while governments almost everywhere preached the virtues of 
depositing regular savings into financial institutions as the way for 
the workers and middle classes to provide themselves with pen- 
sions in their old age. As Robin Blackburn has shown, pension 
contributions fed into the mushrooming expansion of a financial 
system over which the contributors had no control. 11 

This rise of finance was accompanied by a great increase in the 
frequency of financial crises. As Andrew Glyn said in Capitalism 
Unleashed, "Crises involving banking crises, which had almost 
died out in the Golden Age, reappeared in strength from 1973 on- 
wards and became practically as frequent after 1987 as during the 
inter-war period". 12 Martin Wolf noted "100 significant banking 
crises over the past three decades". 13 Yet after each crisis the 
system as a whole seemed to revive again, so that on the eve of its 
greatest crisis there was talk of record growth rates and predic- 
tions of ever faster growth in the future. Finance, in fact, acted like 
a drug for the system, seeming to give it great energy and creating 
a sense of euphoria, with each brief hangover being followed by a 
further dose until the metabolism as a whole suddenly found itself 
being poisoned. 

The debt economy and the great delusion 

The growth of finance was never something separate from what 
was happening to the productive core of the system, but was a 
product on the one hand of its internationalisation, on the other 
of the long drawn out slowdown in accumulation. 

The first big growth of international finance in the 1960s was a 
result of the way the growth of international trade and investment — 


The New Age of Global Instability 

and US overseas military expenditure associated with the Vietnam 
War — led to pools of finance ("Euromoney") which had escaped the 
control of national governments. The next big growth came with the 
recycling of massively expanded Middle East oil revenues through 
the US banking system — revenues that were a product of the in- 
creased dependence of productive capital on Middle East oil. 

The restructuring of productive capital took place increasingly, 
as we have seen, across national borders, even if mostly it was re- 
gional, not global, in scope and did not measure up to much of the 
hype about globalisation. But industry could not restructure in this 
way without having financial connections across borders. It re- 
quired international financial networks if it was to repatriate 
profits or establish subsidiaries elsewhere in the world. An impor- 
tant source of profit for some sections of financial capital lay in the 
fees to be gained by overseeing acquisitions and mergers of pro- 
ductive firms, and that meant there was a gain to be made in 
operating multinationally before they did. As in Marx's descrip- 
tion of finance in his day, it led the way in encouraging productive 
capital to reach out beyond its established bounds. 

Multinational productive capital, in turn, opened up new vistas 
for multinational financial transactions. The success of the 
Japanese car industry in penetrating US markets in the late 1970s 
laid the ground for the flow of Japanese finance into both produc- 
tive investments (car plants) and real estate speculation in the US. 
And the flows of funds and commodities within multinational cor- 
porations provided conduits by which financial transactions could 
if necessary escape governmental control. 

As chains of buying and selling grew longer than ever, so did the 
chains of borrowing and lending — and with them the opportunities 
grew ever greater for financial institutions to make profits through 
borrowing and lending that had no immediate connections with 
processes of production and exploitation. This took place in a 
wider context which made the search for profit through finance in- 
creasingly attractive to capitalists of all sorts — the fall in profit rates 
from their level in the long boom (as described in Chapters Eight 
and Nine). Capitalism internationally went through nearly four 
decades in which profitability was substantially lower, even in its 
period of recovery, than that which had enabled it to expand pro- 
duction and accumulate so rapidly previously. 

Profitability did not collapse completely, and there was a contin- 
uous growth of a mass of past surplus value seeking opportunities 

Financialisation and the Bubbles That Burst 


for fresh profitable investment. But there were not nearly as many 
of these in productive sectors as previously. One consequence, as 
we have seen, was a general slowdown in the level of accumulation 
and decline in average growth rates. Fairly fast growth of produc- 
tive sectors would occur in one part of the world economy or 
another — in Brazil and the East Asian NICs in the late 1970s, in 
Japan and Germany in the 1980s, in the US and the East Asian 
NICs again in the mid to late 1990s, in China and to a lesser extent 
the other BRICS in the 2000s. But profitability was not sufficient to 
raise productive accumulation throughout the system as a whole to 
its previous levels. 

There were increased competitive pressures on individual firms 
to undertake large individual investments so as keep ahead of rival 
firms, but there was less certainty than before about being able to 
make a profit on those investments. Firms, wealthy individuals 
and investment funds reacted by being cautious about committing 
themselves to such investments lest it leave them without ready 
cash ("liquidity" in financial parlance) next time there was a crisis. 
The result was an inevitable tendency for the average level of pro- 
ductive investment to fall. 

Growth of private sector real non-residential capital stock in industrial 
countries 14 

1960-69 5.0 percent 

1970-79 4.2 percent 

1980-89 3.1 percent 

1991-2000 3.3 percent 

These figures, it should be noted, understate the slowdown in pro- 
ductive investment, since a growing share of investment went into 
the non-productive financial sphere. And it was not only in the old 
industrial countries that a falling share of surplus value went into 
productive investment. The "tigers", the NICs and the BRICS 
drew a sharp lesson from the Asian crisis of 1997-8. They were not 
willing to risk being stuck again with a shortfall of ready cash the 
next time international instability hit their markets, and built up 
surpluses on foreign trade that they saved rather than invested do- 
mestically. Even China ended up with an excess of saving over 
investment equal to 10 percent of its national income, despite its 
virtually unprecedented rate of accumulation. 


The New Age of Global Instability 

Globally this meant there was a growing pool of growth of 
money capital — money in the hands of productive as well as non- 
productive capitals — searching for outlets that seemed to promise 
higher levels of profitability. Hence the pressure on firms to deliver 
short-term rather than long-term profits. So too the succession of 
speculative bubbles and the repeated "Minsky" shifts from specu- 
lation to Ponzi schemes in which financiers used the money 
entrusted to them by some investors to pay off other investors and 
line their own pockets. 15 All sorts of speculative, unproductive ac- 
tivities flourished, from pouring money into stock markets or real 
estate to buying oil paintings by old masters. In each case, the rush 
of speculators into buying things in the expectation of rising prices 
was, for a time, a self-fulfilling prophecy. As they outbid each 
other, prices did indeed rise. In this way the ups and downs of the 
productive part of the system found a magnified reflection in the 
ups and downs of various other assets. The financial system ex- 
panded as a consequence, since it played a key part in collecting 
together the funds for speculation, and could then use the assets 
whose value had increased because of speculation as collateral for 
borrowing more funds. 

There developed a mass of capital wandering round the world 
looking for any opportunity where it seemed there might be profits 
to be made. Already in the economic recovery of the late 1980s: 

Financial activity became frenetic, with stock and share and prop- 
erty values soaring upwards... Property speculation rose to new 
heights, and private borrowing reached record levels in the US, 
Britain, and Japan... There was real industrial growth, but it was 
dwarfed by the expansion of the property markets and by various 
forms of speculative activity... General business investment grew 
considerably faster than manufacturing investment — in sharp 
contrast to the 1960s and early 1970s, when manufacturing grew 
at the same speed. The growth of manufacturing investment was 
about a third lower in the US and Japan, and about two thirds 
lower in Europe, than in the earlier period. 16 

Robert Boyer and Michael Aglietta have accurately described what 
happened during the next US boom, in the mid and later 1990s: 

Overall demand and supply are driven by asset price expecta- 
tions, which create the possibility of a self-fulfilling virtuous 

Financialisation and the Bubbles That Burst 


circle. In the global economy, high expectations of profits trig- 
ger an increase in asset prices which foster a boost in consumer 
demand, which in turn validates the profit expectations... One 
is left with the impression that the wealth-induced growth 
regime rests upon the expectation of an endless asset-price ap- 
preciation... 17 

The growth of multinational finance increased the instability of the 
system, but did not cause it. Enhanced instability in turn encouraged 
productive firms to seek speculative profits in a way that further 
boosted the financial sector and added still more to the instability. 

A prime example of this was the rise of the derivatives mar- 
kets. Their original function was to provide a sort of insurance 
against sudden changes in interest or exchange rates. This was an 
extension of the long established practice of buying and selling 
"forward" — agreeing now on a price to be paid at some specified 
point in the future for some commodity. Now derivatives devel- 
oped into elaborate systems of payments for options to buy and 
sell currencies or to lend or borrow money at various rates at dif- 
ferent times in the future. In doing so, they provided productive 
firms with some protection against their calculations of future 
competitiveness and profitability being upset by sudden changes 
in various markets — and became an integral part of normal busi- 
ness for many companies. 18 But that was not the end of the 
matter. The derivatives that provided that protection could them- 
selves be bought and sold, and it was then possible to gamble on 
changes that would take place in their prices if exchange or in- 
terest rates went up or down. Hedge funds, working with money 
provided by rich individuals putting in a few million dollars 
each, found they could make very large profits by borrowing in 
order to make such bets, assuming (as every poor gambler does) 
that they were bound to win. 

The reliance on derivatives was not the only way in which the 
boundaries between productive capital and the financial sector were 
eroded. Many industrial concerns began to look to finance as a way 
of profit making. In the 1990s both Ford and General Motors turned 
towards financial activities such as "leasing, insurances, car rental", 
so that "during the boom 1995-98 a third of the [Ford] group's profit 
accrued from services". 19 The Economist has told of the US's cur- 
rently biggest manufacturing firm, General Electric, that its "profits 
grew with the sort of predictable consistency... made possible 


The New Age of Global Instability 

by. ..making good any unexpected shortfall with last-minute 
sales of assets held by the firm's notoriously opaque finance 
arm, GE Capital," which was responsible for "40 percent of 
GE's revenue". 20 

As capitalism in all its forms turned to financial operations to 
complement productive operations from the early 1970s, gov- 
ernments came under pressure to abandon controls imposed on 
financial transactions. For a time governments still committed to 
the state capitalist or Keynesian notions of the previous period 
attempted to hold the line against the way finance could well 
over national borders. But one by one they gave up the attempt, 
partly because they saw old controls of currency and capital 
movements as ineffective, partly because, accustomed to adjust- 
ing their horizons to what capital said was possible, they were 
won over to the idea that this was the only way to achieve a new 
cycle of capital accumulation. The approach of those who had 
started off on the social democratic left was that if you could not 
beat them, then join them. 

Usually the speculation was in non-productive spheres — repeated 
stock exchange and real estate bubbles. But occasionally it focused 
on some area where they believed there was profit to be made by 
productive investment. As the Financial Times told of the late 1990s: 

Spending on telecoms equipment and devices in Europe and the 
US amounted to more than $4,000 billion. Between 1996 and 
2001 banks lent $890 billion in syndicated loans... Another 
$415 billion of debt was provided by the bond markets and 
$500 billion was raised from private equity and stock market 
issues. Still more came from profitable blue chips firms that 
drove themselves to the brink of bankruptcy or beyond in the 
belief that an explosive expansion of internet use would create 
almost infinite demand for telecoms capacity. The global finan- 
cial system became addicted to fuelling this bonfire. Nearly half 
European bank lending in 1999 was to telecoms companies... 
about 80 percent of all the high-yield, or junk, bonds issued in 
the US were to telecoms operators. Five of the ten largest merg- 
ers or acquisitions in history involved telecoms companies. 21 

The fact that there was a productive element to this boom added to 
the great illusion that it could go on forever. But the boom was 
based on speculation, ascribing massive exchange value to products 

Financialisation and the Bubbles That Burst 


for which the current use value was very limited. So much "band 
width" had been created, the Financial Times said, that: 

if the world's 6 billion people were to talk solidly on the tele- 
phone for the next year, their words could be transmitted over 
the potential capacity within a few hours... [only] 1 or 2 percent 
of the fibre optic cable buried under Europe and North America 
has even been turned on. 22 

The telecoms boom inevitably collapsed, causing widespread dis- 
array. By the beginning of September 2001 (before the 9/11 attack 
which is usually blamed for that year's recession) the "stock 
market value of all telecom operators and manufacturers" had 
"fallen by $3,800 billion since its peak in March 2000" and 
"probably $1,000 billion" had gone "up in smoke". 23 

Faced with the collapse of this bubble into productive invest- 
ment, it is perhaps not surprising that the next bubble would be 
around something that seemed to be... "as safe as houses". 
During the recovery from the 2000-2 recessions those with money 
(old fashioned banks, newer financial groups such as hedge funds, 
and rich individuals with a few million in ready cash) found they 
could expand their wealth by borrowing at low interest rates in 
order to lend to those prepared for, or conned into, paying higher 
interest rates. Bits of various loans were then parcelled together 
into "financial instruments" to be sold at a profit to other finan- 
cial institutions which in turn would sell them again. Those at one 
of end of the chain of lending and borrowing would not have the 
remotest idea where interest was coming from at the other end. In 
fact, many of those expected to pay it were poorer sections of the 
American population desperate to get somewhere to live but pre- 
viously regarded as uncreditworthy. They were lured into taking 
out mortgages with "tickler" fixed term low rates of interest 
which could then suddenly be increased after two or three years. 
Rising house prices were supposed to make lending to them safe, 
since if they defaulted on their loans their homes could be repos- 
sessed and sold at a handsome profit. The fact that it was 
precisely the willingness of financial institutions to bid against 
each other to offer loans to buy houses that was raising the 
prices — and that prices would inevitably fall if they all began re- 
possessing — was something that escaped the notice of the 
geniuses who ran these institutions. 


The New Age of Global Instability 

The more corporations inflated their wealth by losing touch 
with reality the more they were honoured. The British bank 
Northern Rock was "the toast of a glitzy City dinner where it was 
heaped with praise for its skills in financial innovation". 24 Gordon 
Brown praised the "contribution" of Lehman Brothers "to the 
prosperity of Britain". 25 Ramalinga Raju was named India's 
"Young Entrepreneur of the Year" and awarded the Golden 
Peacock award by the World Council for Corporate Governance 
just months before it was revealed that he had defrauded his own 
company of one billion dollars. 

Again it has to be stressed that the speculative ventures of these 
years did not just involve financial capitalists. Industrial and com- 
mercial capitalists took part. More than half the supposed growth 
in the worth of the whole of the non-farm, non-financial corpo- 
rate sector of the US in 2005 had been due to inflation in its real 
estate holdings. 26 

The finance-led bubbles were not, however, just important as a 
source of profits for the supposedly productive sector of the econ- 
omy. They were also central in ensuring it had markets that neither 
its own investment nor what it paid its workers could provide. 
This was true of the bubbles of the 1980s and 1990s. The combi- 
nation of reduced investment and attempts to hold down wages in 
the old industrial countries (and success in cutting them in the US) 
made consumer debt increasingly important in providing demand 
for output. It was even truer in the early and mid-2000s. Without 
the "housing" and "subprime mortgage" bubble there would have 
been very little recovery from the recession of 2001-2. 

These were years in which the real earnings of workers in the 
US, Germany, France and some other countries tended to fall. 
They were also years in which productive investment was low in 
all the "old" capitalisms. "Investment rates have fallen across vir- 
tually all industrial country regions", said one IMF study. 27 
Another report, for JP Morgan, told in 2005: 

The real driver of this saving glut has been the corporate 
sector. Between 2000 and 2004, the switch from corporate 
dis-saving to net saving across the G6 [France, Germany, the 
US, Japan, Britain and Italy] economies amounted to over $1 
trillion... The rise in corporate saving has been truly global, 
spanning the three major regions — North America, Europe, 
and Japan. 28 

Financialisation and the Bubbles That Burst 


In other words, "instead of spending their past profits", US busi- 
nesses were "now accumulating them as cash". 29 

A low level of investment combined with falling real wages 
would, in normal circumstances, have resulted in continued reces- 
sion. What prevented that was precisely the upsurge of lending via 
the financial system to American consumers, including the recipi- 
ents of subprime mortgages. It created a demand for the 
construction and consumer goods industries — and via them for 
heavy industry and raw materials — that would not otherwise have 
existed. Recovery from the recession depended on the bubble, 
what the Italian Marxist Riccardo Bellofiore has aptly called "pri- 
vatised Keynesianism". 30 

The productive capitalists who were the beneficiaries of the op- 
eration were not just to be found in the US and Europe, but also 
across the Pacific in East Asia. Japanese industry, still suffering 
from the decline in profitability in the early 1990s, staged some re- 
covery by exporting hi-tech equipment to China which then used it 
(along with components from the other East Asian states and 
Germany) to build up ever greater exports to the US. And it was 
the surpluses on their trade with the United States that Japan, 
China and the other East Asian economies deposited in the US, 
which helped finance the bubble and so provided a boost to the 
whole world economy, including their own part of it. 

As Martin Wolf rightly commented, "Surplus savings" created 
"a need to generate high levels of offsetting demand", 31 and lend- 
ing to poor people provided it: "US households must spend more 
than their incomes. If they fail to do so, the economy will plunge 
into recession unless something changes elsewhere"; 32 "The Fed 
could have avoided pursuing what seemed like excessively expan- 
sionary monetary policies only if it had been willing to accept a 
prolonged recession, possibly a slump". 33 In other words, only the 
financial bubble stopped recession occurring earlier. The implica- 
tion is that there was an underlying crisis of the system as a whole, 
which could not have been resolved simply by regulating financiers. 

Wolf and others who emphasised the imbalances in the global 
productive economy did not locate their roots in problems of prof- 
itability. To have done so would have required at least half a turn 
from neoclassical economics to classical political economy, and es- 
pecially to Marx. But low profitability was, as we have seen, behind 
the slowdown in productive accumulation in North America, 
Europe and Japan, while the partially successful attempts to sustain 


The New Age of Global Instability 

profits at the expense of wages were responsible for the increasing 
dependence of consumption on debt. It was also the attempts to 
maintain profitability in the face of an ever greater piling up of 
fixed capital that led to the holding back of consumption in 
China — and, as part of doing so, efforts to stop any rise in the in- 
ternational value of the yuan. And the memory of the crises of the 
1990s taught the other BRICS and NICs that their own economies' 
profitability was not high enough to protect them from global in- 
stability, leading them, too, to pile up surpluses. In general, it can 
be said that the different sectors of world capitalism would not 
have become dependent on the bubble had profit rates returned to 
the levels of the long boom. 

Financialisation provided a substitute motor, in the form of 
debt, for the world economy in the decades after the US arms 
economy lost a good part of its effectiveness. The permanent arms 
economy had to be supplemented by the debt economy. But by its 
very nature a debt economy could not be permanent. The massive 
profits that banks make during any bubble represent claims on 
value produced in the productive sections of the economy. When 
there is a sudden decline in the prices of the assets they have previ- 
ously bid up (in the housing, property, mortgage and share 
markets) they discover those claims are no longer valid and that 
they cannot pay their own debts unless they get cash from else- 
where. But the very process of trying to raise cash involves selling 
further assets; as all banks do so, asset prices decline still more and 
their individual balance sheets deteriorate further. The bubble 
bursts and the boom turns into a crash. 

As Marx put it: 

All this paper actually represents nothing more than accumu- 
lated claims, or legal titles, to future production whose money 
or capital value represents either no capital at all... or is regu- 
lated independently of the value of real capital which it 
represents... And by accumulation of money-capital nothing 
more, in the main, is connoted than an accumulation of these 
claims on production. 34 

What happened through the early and mid-2000s was that the 
banks assumed that these claims were themselves real value and 
entered them in the positive side of their balance sheets. A chas- 
tened Adair Turner, former head of the British employers' CBI and 

Financialisation and the Bubbles That Burst 


former vice-chairman of Merrill Lynch Europe, recognised after 
the event, "The system in total has become significantly more re- 
liant on the assumption that a very wide range of assets could be 
counted as liquid because they would always be sellable in liquid 
markets". 35 Profits were measured according to "mark to market" 
valuations of assets — that is, according the level to which compet- 
itive bidding had raised them. But once there was a decline in the 
mortgage and property markets, financiers had to try to cash their 
assets in if they were not going to go bust — and found they could 
not. This is what the process which goes under the name of 
"deleveraging" was about. 

Martin Wolf again described what was happening accurately: 

The leverage machine is operating in reverse and, as it gener- 
ated fictitious profits on the way up, so it takes those profits 
away on the way down. As unwinding continues, highly 
indebted consumers cut back, corporations retrench and un- 
employment soars. 36 

Hence the first moment of truth of August 2007, when some of the 
hedge funds controlled by banks discovered they could not pay 
their debts and banks stopped lending to each other out of fear 
they would not get their money back. Hence the failure of the hun- 
dreds of billions poured into national banking systems to prevent 
the second moment of truth in mid-September 2008 when the col- 
lapse of Lehman Brothers was followed within days by the 
threatened collapse of banks in nearly all the major Western states 
(AIG in the US, HBOS in Britain, Fortis in Belgium and the 
Netherlands, Hypo Real Estate in Germany, the three major Irish 
banks, the Icelandic banks). Hence the way in which in the two 
months that followed even banks which thought they had gained 
from the problems of their competitors were in dire trouble — 
Citibank (the world's biggest) and Bank of America in the US, 
Lloyds in Britain. 

Hence, finally, it was clear the crisis was no longer just one of fi- 
nance. The vast expansion of finance had created the illusion of a 
new "long upturn" in productive accumulation; the crisis of fi- 
nance made that illusion disappear with traumatic effects. There 
was "a week of living perilously" in November as "panic seized 
the markets" . 37 In the US Chrysler lost millions by the day, General 
Motors said it needed $4 billion immediately to avoid bankruptcy 


The New Age of Global Instability 

and Ford joined in asking for a $34 billion government handout. 
In Britain, Woolworths and MFI went bust. The toll of sackings in 
every sector began to compare with the haemorrhaging of jobs in 
the crisis of the early 1980s. And the pain was felt not merely on 
both sides of the Atlantic, but on both sides of the Pacific too. 

In the spring of 2008 the dominant theme in mainstream eco- 
nomic commentary had been that a "decoupling" of different 
national economies would enable Asia to keep expanding at its old 
speed while Europe and America suffered. By new year 2009 the re- 
cession had spread to Japan, where car output fell at a record rate, 
to China, where there were thousands of factory closures in the 
south east, 38 and to India, where a business lobby group warned that 
10 million manufacturing jobs could be lost as exports collapsed. 39 
The victims of the Asian crisis of 1997 — Thailand, South Korea, 
Singapore, Malaysia, Indonesia — were battered once again. So too 
were the victims of the slump which swept the former Eastern bloc 
from the late 1980s onwards — the Baltic states, Ukraine, Hungary, 
Bulgaria, Romania. In Russia the collapse of the record world oil 
prices of only six months before led to a fall in the value of the 
rouble, escalating inflation and a renewed spread of poverty. 

Financialisation and the debt economy had proved incapable of 
moving world accumulation forward at its old speed in the 1980s, 
1990s and mid-2000s. It had faltered every few years and, at the 
end, threatened to fail completely, leading to a crisis of unpre- 
dictable depth. Governments which in words, if not in practice, 
had insisted that the free market could be left to cure its own 
faults, were now faced with the grim reality that left to itself capi- 
talism could, as in the 1930s, threaten to fall into a catastrophic 
slump, with the collapse of each giant firm ricocheting through the 
economy and leading to the collapse of others. 

Urged on by some of the giant corporations, states saw no al- 
ternative but to intervene in the economy on a scale 
unprecedented except under circumstances of total war. So it was 
the Bush administration, the most right wing in the US for 75 
years, that effectively nationalised the mortgage corporations 
Fanny Mae and Freddy Mac early in September. There was one 
last attempt to rely on the market when it allowed Lehman 
Brothers to go bust — a decision praised by the Financial Times 
editorial as a "courageous" and a "risk that might well pay off". 40 
The disastrous outcome left states with no choice not only to at- 
tempt one and half trillion dollar bail-outs, but in effect to 

Financialisation and the Bubbles That Burst 


partially, and sometimes completely, nationalise not just relatively 
small banks like Northern Rock and Bradford & Bingley in 
Britain, but some of the giants. As they did so, their advisers began 
to ponder whether the only solution to the crisis might be the na- 
tionalisation of whole banking systems. State capitalism, and its 
ideological correlate, Keynesianism, was making a massive come- 
back after being hidden in an ideological closet for a generation. 

Finance and "financialisation" 

The great crisis that erupted in 2007 led those who had rejoiced at 
the wonders of capitalism during the great delusion to try to pin 
the blame on something other than capitalism as such. The easiest 
way to do this was to see the "the banks" and "finance" as de- 
tached from the rest of the capitalist system. French president 
Nicolas Sarkozy went to a G7 meeting in January 2008 declaring 
that "something seems out of control" with the financial system 
and calling for increased controls over it. 41 All accounts of the 
Davos World Economic Forum in 2009 told of the deep unpopu- 
larity of the banks with the representatives of multinationals and 
governments: "The audience cheered in one debate when Nassim 
Nicholas Taleb, author of The Black Swan, said it was time to 
punish bankers by forcing them to hand back bonuses". 42 

Such arguments led to a simple conclusion: the way to prevent 
future financial crises was greater regulation of finance. Such was 
the response of many mainstream economists — former mone- 
tarists and moderate Keynesians alike, with repeated discussions 
in the pages of the Financial Times over the degree of regulation 
that was possible and necessary. This was also the response of 
some analysts on the reformist left. Robert Wade of the LSE could 
provide riveting accounts of the absurdities of finances that led to 
the crisis and then conclude that greater controls could stop 
them. 43 Larry Elliot and Dan Atkinson in their book The Gods that 
Failed blamed "the gods of finance", called for increased regula- 
tion and a breaking up of the gigantic financial institutions, and 
then saw some hope in a meeting of G7 policy makers early in 
2008 that contemplated "measures to rein in the turbo charged fi- 
nancial interests". 44 

Rather further to the left the rise of finance had already led to the 
re-emergence of the old notions of Hobson, Hilferding and Kautsky 


The New Age of Global Instability 

of "finance" or "finance capital" as having distinct interests from 
productive capital. The French campaigning organisation ATTAC 
had started life in the late 1990s committed to opposition to finan- 
cial speculation, not to capitalism as such. 45 Its central demand was 
for a "Tobin tax" on movement of financial funds across national 
borders. This, it was claimed, would counter financial crises. Such 
"finance is to blame" arguments found a resonance among many 
radical Marxists. Dumenil and Levy wrote of "neoliberalism" as 
"the ideological expression of the reasserted power of finance" 
which "dictates its forms and contents in the new stage of interna- 
tionalisation. 46 James Crotty's tone was very similar, arguing that 
"financial interests have become much more economically and po- 
litically powerful, and... these trends have been coterminous with a 
deterioration in real economic performance". 47 Francois Chesnais 
wrote of "a globalised regime of financially dominated accumula- 
tion", 48 in which "the movement of money capital has become a 
fully autonomous force vis-a-vis industrial capital", forcing it either 
to accept a "deep interpenetration with money capital, or to submit 
itself to its exigencies". 49 He took up the expression of Mable, Barre 
and Boyer, according to which "bad capitalism" had been able to 
chase out "good". 50 Chesnais as a revolutionary socialist did not 
himself regard the old form of capitalism as "good" (hence his 
putting the word between quote marks). But he did argue that fi- 
nance was to blame for the "mediocre or poor dynamic of 
investment..." 51 A similar emphasis on finance having interests 
strongly opposed to those of productive capital was to be found in 
Peter Gowan's The Global Gamble, a very useful account of US 
capitalism's attempt to maintain global hegemony. He argued that 
"some of the sharpest conflicts within capitalist societies have oc- 
curred... between the financial sector and the rest of society". 52 

The accounts of "financialisation" varied considerably in their 
detail. But they all shared a contention that the "dominance" of 
"finance" led to a shift in the dynamic of the system. Productive 
capital, it was argued, was concerned with productive accumula- 
tion. In the early post-war years this had occurred across the 
industrial world, even if it was organised differently in the US and 
Britain, where industrial corporations had used internally gener- 
ated profits in order to undertake long-term investments, and in 
Japan and West Germany, where collaboration with the banks had 
provided such investment. But the rise of big investment funds and 
the "dominance" of finance had changed that. The situation now 

Financialisation and the Bubbles That Burst 


was that all the pressure was on firms to deliver quick returns to 
shareholders ("shareholder value") through high dividend pay- 
ments and measures that ensured a high share price (so boosting 
shareholders' capital gains), and on governments and national 
banks to keep interest rates high. Versions of this standpoint had 
been presented by Keynesian writers like Will Hutton and William 
Keegan in the 1990s to counterpose the "short-termism" of 
"Anglo-Saxon" capitalism to supposedly long-term, more invest- 
ment oriented approaches of Japanese and German capitalisms. 53 
Now it was extended to all the advanced industrial countries — 
with the partial exception of Germany. 54 

Crotty, Gerald Epstein and Arjun Jayadev referred to this as a 
growth of rentier incomes and "rentier power". They were hark- 
ing back to Keynes's application of the term rentier to idle 
"gentlemen" who were receiving interest or dividends payments 
through the post for doing nothing. But now the rentiers were 
"mutual funds, public and private pension funds, insurance com- 
panies and other institutional investors". 55 

Costas Lapavitsas, who provided excellent factual accounts of 
the development of the financial crisis of 2007-8, nevertheless put 
the stress in explaining it on purely financial aspects — in particu- 
lar the changed behaviour of the banking system, which had 
shifted its lending from industry to lending to individuals and re- 
liance on new computerised technologies. He argued that the 
"direct exploitation" of consumers by the banks had become a 
major new source of surplus value and influenced the dynamics of 
the system. 56 But this form of "exploitation", like that caused by 
supermarkets forcing up prices, 57 is only significant in so far as 
workers do not fight to protect the buying power of their wages at 
the point of production — something unions in Britain have usu- 
ally tried to achieve by demanding wage increases linked to a 
Retail Price Index that includes mortgage interest payments. Or, 
as Marx would have put it, there is only increased exploitation in 
so far as the capitalists who employ workers get away with 
buying labour power at less than its value. 58 It is also worth 
adding that on Lapavitsas's logic it is it not only workers who are 
exploited by the banks but also indebted members of the capital- 
ist class and the new middle class — the median debt of households 
in the US with incomes of more than $100,000 in 2003 was about 
four and a half times that of households with incomes in the 
range of $25,000-$50,000. 59 


The New Age of Global Instability 

The "shareholder value" version of the financialisation argu- 
ment has often been taken for granted. But it contains big gaps. 
Dick Bryan and Michael Rafferty have pointed out that: 

the stock market should not be so heavily emphasised. It is, 
after all, a relatively minor forum for raising funds. Even in the 
so-called market-based systems such as the US, UK and 
Australia, retained earnings, loans and bond issues have been 
far more important... 

Furthermore, pension funds etc: 

rarely if ever play an active role in the managerial decisions of 
firms. Institutional shareholder pressure on company boards... 
is the exception rather than the norm... 60 

The fact that firms hand out a bigger portion of their profits as div- 
idends need not in itself slow down the level of investment. The 
"rentier" shareholders can themselves lend a portion of their in- 
comes back for further investment — and will do so if they think it 
is going to be profitable enough to do so. One proponent of the 
"shareholder value" interpretation, Stockhammer, admits that 
most economists hold that: 

Financial investment is a transfer of assets, not a use of 
income. Buying stocks transfers liquidity from one economic 
agent to another, possibly from firms with bad investment 
opportunities to ones with good opportunities. Thus macro- 
economically financial investment cannot substitute for 
physical investment. 61 

And Crotty suggests at one point that "financialisation", by in- 
creasing competition between firms, brings about more, "coerced", 
investment. 62 Certainly, big financial institutions have nothing in 
principle against productive investment, even if finance did come to 
absorb a peak figure of 25 percent of total investment in the US in 
1990 as against only 12 percent in the mid-1970s 63 and rose to close 
to half in Britain in the same period. 64 This was shown in the late 
1990s when the dotcom/new technology boom saw industrial in- 
vestment in the US financed by borrowing from the institutions as it 
soared ahead of savings. 

Financialisation and the Bubbles That Burst 


The supposed dominance of finance over production is often 
traced back to the US Federal Reserve under Paul Volcker raising 
interest rates sharply in 1979. Boyer, Crotty, Chesnais, Dumenil 
and Levy all see this "Volcker coup" as a decisive point. Dumenil 
and Levy regard it as the great victory of finance, and argue this 
was why high interest rates were "maintained through the 1980s 
and 1990s". 65 Implicit in such arguments is the suggestion that 
somehow finance in general and shareholders in particular had 
suffered through the decades of the long boom but were only able 
to express their feelings with the "coup" of the late 1970s. The ar- 
gument simply does not fit the historical facts. The post-war 
decades were ones of enormous self-confidence among all sections 
of capitalism. The "golden age" for industrial capital was by no 
means a living hell for its shareholders and financiers. All gained 
as the growth of profitable productive investment translated into 
secure long-term capital gains. 

There was some change with the crisis of the 1970s. The US's 
bankers and multinationals did dislike the way the "macroeco- 
nomic" "Keynesian" response to the crisis of the 1970s led to 
inflation and devaluation of the dollar. But, as Robert Brenner 
points out, had such a policy solved the problems of profitability 
and industrial overcapacity for the rest of US capitalism, "it is 
quite conceivable that even the powerful coalition of interna- 
tional and domestic interests arrayed against it would have 
failed". 66 In fact the Keynesian approach did not achieve these 
capitalist goals. Limited economic recovery from the recession of 
1974-6 increased the level of inflation, which reached 13.3 per- 
cent. This had two negative consequences for all sections of US 
capital. It was likely to encourage workers to struggle over wages. 
And it was undermining the capacity of the US dollar to act as a 
measuring rod for US capitalists in their transactions with each 
other. Forcing up interest rates was meant to solve both prob- 
lems — by reducing the level of economic activity to scare workers 
into accepting lower wage increases (which it did) and to reduce 
inflation (which it also did). This enabled some sections of finance 
to gain and induced a recession that damaged some sections of 
American productive capital. But it also served the general inter- 
ests of all US capitalists. 

As Marx had noted, capitalism needs money to act as a fairly 
stable measure of value, even if damage is done to society as a 
whole in order to achieve it: 


The New Age of Global Instability 

Raising interest rates... can be carried more or less to extremes 
by mistake, based upon false theories of money and enforced on 
the nation by the interest of money lenders... The basis, how- 
ever, is given with the basis of the mode of production itself. A 
depreciation of credit money would unsettle all existing rela- 
tions. Therefore the value of commodities is sacrificed for the 
purpose of safeguarding the fantastic and independent existence 
of this value in money... For a few million in money, many mil- 
lions in commodities must be sacrificed. This is inevitable under 
capitalist production and constitutes one of its beauties. 67 

The suffering of many hundreds of millions as a result of the 
Volcker interest rate hike was a price worth paying to restore a rel- 
atively stable measure of value as far as US capitalism in its entirely 
was concerned — and helped cement its control elsewhere in the 
world. The "coup" by Volcker (and the turn to monetarism under 
Thatcher in Britain) consisted of turning away from one policy that 
was supposed to help restore the profitability of productive indus- 
try — expanding the money supply so as to allow prices and profits 
to rise — to another policy, that of encouraging interest rates to rise 
so as to squeeze out unprofitable firms and to put pressure on 
workers through unemployment to accept lower pay. Capital — and 
not just financial capital — was recognising that the Keynesian or- 
thodoxies of the long boom could not cope with the new phase in 
which capital (including, not least, industrial capital) found itself. 

When this manoeuvre produced only minimal results and it 
became clear that the high interest rates were beginning seriously 
to hurt US industry, Volcker cut them — not only under pressure 
from industrialists, but also from sections of finance. 68 The trend 
of real long term interest rates for the next quarter century was 
down, not up, although they remained above the level of the long 
boom until the year 2000, after which they fell to around 1 per- 
cent in 2003. 

The whole claim that there are two distinct sections of capital — 
finance capital and industrial capital — is open to challenge. Many 
important financial institutions not only lend money, but also 
borrow it, since they are involved in "intermediation" between 
lenders and borrowers. What matters for them is not the absolute 
level of interest rates but the gaps that open up between different 
rates, particularly between long-term and short-term rates. And in- 
dustrial concerns lend as well as borrow. Typically they accumulate 

Financialisation and the Bubbles That Burst 


surpluses between bouts of new investment, which they lend out in 
return for interest (see Chapter Three). They also advance credit to 
the wholesalers who take their produce off their hands. In short, in- 
dustrial capital takes on some of the attributes of finance capital. 
As Makato Itoh and Costas Lapavitsas point out, "Revenue in the 
form of interest tends also to accrue to industrial and commercial 
capitalists, and cannot be the exclusive foundation for a social 
group". 69 Thomas Sablowski — who accepts part of the "share- 
holder value" position — makes the point: 

At the level of the common sense, it seems to be no problem to 
talk about finance and industry, like they were objects easily to 
distinguish. However, the definition of the concepts of industrial 
capital and financial capital is no easy task... 70 

But if this is true, then it is difficult to see how the recurrent crises 
of the last four decades — financial and industrial — could simply 
be blamed on finance. A coherent explanation of the crises has to 
look at the system as a whole, and the way in which its different 
components react on each other. This is what Marx tried to do in 
a long, if rambling and unfinished, discussion of credit and fi- 
nance in Volume Three of Capital. It is also what Hilferding 
attempted to do with the earlier chapters dealing with these ques- 
tions in Finance Capital. These insights need to be developed to 
take account of the extraordinary development of finance, of fi- 
nancial institutions and of financial crises in the late 20th and 
early 21st century. 

Ideology and explanation 

Any great crisis does not just have economic consequences. It 
turns capitalist against capitalist as each tries to offload the cost 
of the crisis on others, just as it creates deep bitterness among the 
mass of the population. The crisis that began in 2007 fitted this 
pattern, and putting the blame on the banks was an escape route 
for all those who had argued so vigorously that neoliberalism 
and capitalist globalisation promised humanity a glorious future. 
So Gordon "the end of boom and bust" Brown argued that this 
was "a completely different sort of crisis" to those of the "previ- 
ous 60 years", since it was a "global financial crisis caused by 


The New Age of Global Instability 

irresponsible lending practices, laxity in them and problems of 
regulation". 71 In this way, the reality of 180 years of periodic 
crises was shoved aside, in a desperate attempt to continue to 
extol the virtues of capitalism. 

Those radical economists who put the stress on financialisation 
in creating the crisis risk opening the door to such apologies for 
the system. Their characteristic argument has been to claim that 
profit rates had recovered in the 1980s and 1990s sufficiently to 
have brought about a revival of productive investment were it not 
for the power of financial interests. Such was the argument of the 
French Marxist Michel Husson, when he claimed in 1999 that 
there were "high levels of profitability", 72 and Stockhammer and 
Dumenil were saying much the same thing in the summer and 
autumn of 2008. 73 If they were right, the crises which broke in 
2001 and on a much bigger scale in 2007-8 would indeed have 
had causes very different to previous ones, including the inter-war 
slump, and greater control by the existing state over the behav- 
iour of the financial sector would in the 21st century be sufficient 
to stop such crises. In accordance with such an approach, 
Dumenil and Levy described the "Keynesian view" as "very sen- 
sible" and looked to "social alliances" to "stop the neoliberal 
offensive and put to work alternative policies — a different way of 
managing the crisis". 74 

Yet, as we have seen from the various profit rate calculations in 
Chapters Eight and Nine, there seems little to justify claims that 
crises today have different roots to those in the past. The form of 
the crisis might be different each time to the last, but its impact will 
be just as devastating. No amount of regulation of finance alone 
will prevent a recurrence of crisis, and the cost to the capitalist 
state of trying to stop this can become almost unbearable. 

It is true that "financialisation", having risen out of a situation 
of low rates of profit and accumulation, fed back into both. There 
was enormous waste as labour and skills went into moving money 
from one pocket to another; as potentially productive material re- 
sources were used to build and equip ever more grandiose office 
buildings, and as the financial "Masters of the Universe" gorged 
themselves in conspicuous consumption. It may also be, as Ben 
Fine has argued, that financialisation had the effect of driving a 
"wedge... between real and fictitious accumulation", 75 making it 
difficult for capitalists to see through the fog of the markets and 
recognise productive investment opportunities. But, ultimately, it 

Financialisation and the Bubbles That Burst 


was the deeper problems facing the productive sectors of capital 
that brought this situation about. Finance is a parasite on the back 
of a parasite, not a problem that can be dealt with in isolation 
from capitalism as a whole. 

The contradictions of the new Keynesianism 

The way the crisis was rooted in the economic system as a whole 
was shown by the sheer difficulties governments had in reacting to 
it. This was a crisis that hurt big capitals and not just those who 
laboured for them. Humpty Dumpty had indeed fallen off the 
wall. Yet it seemed that all the king's horses and all the king's men 
could not put him together again. 

The response of virtually all governments to the crisis that 
erupted in 2007-8 was to turn away from the free market policies 
they had proclaimed for three decades as the only ones that would 
work. Overnight they ditched Hayek for Keynes and kept only 
that bit of Friedman that urged increasing the money supply to 
ward off deflation. 76 

But the conditions for applying Keynesian policies with any 
hope of success were worse than they had been when they had 
been tried and abandoned 30 years before. The known scale of the 
losses made by the banks dwarfed those of the mid-1970s — and no 
one knew, as each bank went bust, which other banks were owed 
money by it and might go bust too. 

The promised bail-outs were massively bigger than those at- 
tempted by Roosevelt's New Deal in the 1930s. US federal 
expenditure then peaked at just over 9 percent of national output 
in 1936. This time round it was already 20 percent before the crisis 
began, and the Bush and then the Obama administrations raised it 
several percentages more. But the levels of debt in the system that 
somehow had to be covered were also much greater if the financial 
system was to begin to function again. George Soros calculated 
"total credit outstanding" at 160 percent of gross domestic prod- 
uct in 1929, rising to 260 percent in 1932; in 2008 it was 365 
percent and "bound to rise to 500 percent". 77 The Bank of 
England estimated in the autumn of 2008 the global losses of the 
financial system to be as high as $2,800 billion. 78 Nouriel Roubini 
estimated the losses of the American banks alone at $1,800 billion 
early in 2009. 79 As governments poured in the money, mainstream 


The New Age of Global Instability 

economists offering advice debated with each other whether it 
would be enough to halt the transformation of recession into slump, 
whether governments would be able to raise the money without 
forcing up the interest rates they were trying to lower, whether they 
should turn to "quantitative easing" — that is, printing money — and 
whether any success with this might not risk bringing about a new 
inflationary spiral and an even greater slump. 80 

The problem did not just lie with the size of the banks' losses. It 
also lay with the massive internationalisation of the system com- 
pared with either the 1930s or even the 1970s. The Keynesian 
remedies which were supposed to deal with the crisis were reme- 
dies to be applied by national governments, none of which had the 
resources to pay for all the losses of the global system of which 
they were part. The biggest states might conceivably be able to sal- 
vage a good part of their national financial system. But the 
problems even here were vast, and many of the smaller states had 
very little chance of coping. 

The system in a noose 

The crisis had revealed one of the great fault lines running through 
capitalism in the 21st century. The complex interaction of states 
and capitals which had been simplistically referred to as globalisa- 
tion makes it much more difficult for national states to fulfil their 
function of aiding the gigantic capitals based within them just as 
the need for that aid becomes greatest. As Paul Krugman puts it, 
there are "major policy externalities", since "my fiscal stimulus 
helps your economy, by increasing your exports — but you don't 
share in my addition to government debt" and so "the bang per 
buck on stimulus for any one country is less than it is for the world 
as a whole". 81 

It was a contradiction that inevitably led to deep political fis- 
sures within national ruling classes and to bitter divisions between 
the states which were supposedly cooperating to deal with the 
crisis. Domestically, sections of capitals complained bitterly in 
2007-9 at the potential cost of bailing out other sections of capital, 
and internationally governments quarrelled with each other as the 
concentration of each on efforts to prevent the collapse of its 
nationally based capitals led to accusations of "financial protec- 
tionism". As one observer told the Financial Times: 

Financialisation and the Bubbles That Burst 


There is a very strong law of unintended consequences taking 
place after all the bank bail-outs. We will see more and more ac- 
tivist government policies that distinguish economic activities 
according to the nationality of the actors. It should be a big con- 
cern to everybody. 82 

At the time of the World Economic Forum in January 2009 
Gordon Brown warned against "financial protectionism", and he 
was then denounced in turn for that very sin as he pressurised 
British banks to lend domestically and not abroad; 83 the German 
government was criticised for not boosting its domestic economy 
but relying on exports to the countries that did; it in turn criticised 
the French and British rescue packages as a form of subsidy to 
their firms which would damage German interests; the new US 
government denounced China's government for "manipulating" 
its currency to aid its industries; the Chinese government retorted 
that US finance had caused the whole mess; 84 and "less wealthy 
countries fretted" that the US would "use force majeure to soak 
up capital". 85 

The ideologists of free trade warned that protectionism risked 
deepening the recession as the Smoot-Hawley Act in the US sup- 
posedly did in the summer of 1930 by raising tariffs on certain 
imports. As Peter Temin has noted, "The idea that the Smoot- 
Hawley tariff was a major cause of the Depression is an enduring 
conviction... and has found its way into popular discussion and 
general histories". 86 But he adds, "Despite its popularity, this ar- 
gument fails on both theoretical and historical grounds." Exports 
only fell by 1.5 percent of US GNP between 1929 and 1931, while 
"real GNP fell 15 percent in the same years". 87 And the first real 
movement from the depths of the slump two and a half years later 
came after measures by Roosevelt which included putting national 
capitalist interests first with an effective devaluation of the dollar. 
Even more effective, as we have seen, were those measures taken 
by the Nazi state in Germany. 

For those firms that produced mainly for the national market 
(the great majority in early 1930s), it was better to be in a protec- 
tionist state than a non-protectionist one. That was the rationale 
for state capitalism and its ideological correlates: Keynesianism, 
dependency theory and Stalinism. If the state could get control of 
the most important investment decisions in the national economy, 
it could assure that the mass of surplus value was absorbed in new 


The New Age of Global Instability 

accumulation even if the rate of profit continued to fall. This, how- 
ever, was a policy that could only work up to the point at which 
the drive to accumulate collided with the restrictions imposed by 
the narrowness of national boundaries. This limitation showed 
itself in the drive of Germany and Japan to expand their national 
boundaries through war in the mid to late 1930s, in the declining 
effectiveness of the US arms economy by the early 1970s and in the 
crisis that tore the USSR apart in 1989-91. 

Today the sheer scale of integration of national economies 
means that serious implementation of state capitalist solutions 
would cause enormous disruption to the system as a whole. Yet for 
national states simply to sit back and leave giant firms to go bust in 
the hope of crises liquidating themselves, as the Hayekians preach, 
would do even greater damage. The two long-term tendencies 
pointed to by Marx — for the rate of profit to fall on the one hand 
and for the concentration and centralisation of capital on the 
other — combine to put the whole system in a noose. The attempts 
of capitals and the states in which they are based to wriggle out of 
it can only increase the tensions between them — and the pain they 
inflict on those whose labour sustains them. 

As states stepped in to intervene in the economy to cope with 
the crisis after October 2008, some sections of the left believed 
that the resurrection of Keynes meant the resurrection of the wel- 
fare policies of the long boom. In Britain, Ken Livingstone, former 
mayor of London, declared that the "economic assumptions of 
New Labour's thinking... have been abandoned". Polly Toynbee 
proclaimed, "At last, the party of social justice has woken up... 
The New Labour era is over." Derek Simpson, joint general secre- 
tary of the biggest UK trade union, Unite, saw the pre-budget 
report as "a welcome warm up exercise after 30 years of inaction 
and neoliberal economics". Yet reality soon proved otherwise. The 
government aimed to pay for a short-term economic boost with 
long-term cutbacks in expenditure on education, health and social 
services. The new Keynesianism for capital was combined with a 
continuation of neoliberalism for those who worked for it. 

This was not a peculiarity of Britain. In every sector of the 
world system the attempt to deal with long-term downward pres- 
sures on profit rates continued to mean efforts to push through 
counter-reforms in working hours, welfare provision, wage rates 
and pensions. The push was intensified as global economic 
growth fell to zero and threatened to fall further. The turn to 

Financialisation and the Bubbles That Burst 


Keynesianism could neither restore the system to its old vigour 
nor serve the interests of the workers, the peasants and the poor. 

The system was only able to recover from the crisis of the inter- 
war years after a massive destruction of value through the worst 
slump capitalism had ever known followed by the worst war. The 
greater size and interconnectedness of capitals today means that 
the destruction of value would have to be proportionately greater 
to return the system to a new "golden age". After all, even the 
bankruptcy of the world's second biggest economy, that of the 
USSR, two decades ago had only marginal benefits for the rest of 
the system — a lower global price of oil than would otherwise have 
been the case and some cheap skilled labour power for West 
European firms. 

It is necessary to repeat that this does not automatically mean 
endless slump. The limits on the degree to which some capitals can 
gain from the destruction of others do not mean that no gains at 
all are possible. The wiping out of many small and medium sized 
firms can provide some relief for the giant firms that states prop 
up. New bubbles and periods of rapid growth in one part of the 
world or another are not only possible but likely. But they will not 
involve the whole world economy moving forward uniformly and 
will only prepare the way for more burst bubbles and more crises. 
And the consequences will not only be economic. 


The New Age of Global Instability 

Part Four 




The New Limits of Capital 

A system that undermines itself 

Capitalism became a global system in the 20th century in a way it 
had not been before. Not only were there global markets and global 
finance but capitalist industry and capitalist structures of con- 
sumption arose in every region of the globe, although unevenly. As 
that happened a tendency noted in its embryonic form by only the 
most far sighted thinkers of the 19th century, including Marx and 
Engels, developed until by the end of the century it was visible to 
everyone who cared to look. This was the tendency for the system 
to undermine the very process of interaction with nature on which 
it, like every other form of human society, depended. 

The most dramatic expression of this has been the way the ac- 
cumulation of certain gases in the atmosphere are raising the 
global temperature and producing climate change. 

Capitalist industry and its products always had devastating en- 
vironmental effects. Observers of all sorts bemoaned the pollution 
of the water and atmosphere in the industrial areas of Britain in 
the mid-1 9th century. Charles Dickens wrote in 1854 of his fic- 
tional (but all too real) Coketown, "where Nature was as strongly 
bricked out as killing airs and gases were bricked in"; 1 Engels told 
of how, "Bradford lies upon the banks of a small, coal black, foul- 
smelling stream. On weekdays the town is enveloped in a grey 
cloud of coal smoke". 2 Epidemics of cholera and typhoid would 
sweep through cities; tuberculosis was a curse that most working 
class families were acquainted with. 

But the disastrous environmental effects of capitals' blind self- 
expansion were local effects. It was possible to escape from the 
smog filled cites, the rivers so polluted that fish could not survive 
in them, the slag heaps and the open sewers. The bigger scale of 
capitalist production and accumulation in the 20th century meant 


bigger environmental destruction — the transformation of agricul- 
tural land into a dust bowl in parts of the US in the 1930s, the 
horrendous escape of gases that killed thousands in Bhopal in 
India in 1984, the nuclear accidents at Three Mile Island in 
Pennsylvania and Chernobyl in Ukraine, the devastation of the 
lives of the people who lived around the Aerial Sea as they lost two 
thirds of their water to cotton production and salination set in, the 
collapse of cities built on earthquake fault lines. These were, how- 
ever, still local disasters, despite the scale of the human toll. 
Supporters of capitalism — and of the state capitalism usually 
called "socialism" — could dismiss their relevance as passing acci- 
dents. Critics of capitalism would denounce their horrors, but not 
see them as having a systemic impact. 

It was not until the end of the 1950s that scientists found the 
first evidence that man-made gases were beginning to create a 
global catastrophe by causing average temperatures to rise — and 
not until the late 1980s that definite proof emerged of how serious 
the situation was becoming. 3 

The scientific conclusions are well enough known for a mere 
summary here to suffice. The most important of these gases, as 
most people now know, is carbon dioxide, produced by burning 
carbon based substances such as oil and coal to obtain energy — 
although gases such as methane and nitrous oxide also have to be 
taken into consideration. The concentration of these gases in the 
atmosphere is measured in terms of parts of carbon dioxide 
equivalent per million, or ppm. In pre-industrial times it was 280 
ppm; it now stands at 385 ppm and is rising by about 2.1 ppm a 
year. So far the change has been sufficient to raise the average 
temperature of the Earth by about 0.8 degrees Celsius, and if emis- 
sions continue at their present rate, there will be further 
temperature rises of about 0.2 degrees a decade. This is if other 
things remain as at present. But there are various feedback mech- 
anisms produced by rising temperatures that would lead to 
accelerated change — the melting of ice caps, the release of carbon 
dioxide in the sea or of methane from arctic tundra, the desertifi- 
cation of forests. There is no final scientific consensus as to the 
temperatures (the "tipping points") that would cause these feed- 
back mechanisms to take effect, but it was widely accepted in 
2007 that some would be likely to set in if the temperature rose 2 
degrees above the pre-industrial level — about 1.2 degrees above 
that at present (that does not preclude some of these mechanisms 


The Runaway System 

setting in earlier, as, for instance NASA's James Hanson argued in 
April 2008). 4 To avoid that point being reached, carbon concen- 
trations have to be kept down — the IPCC argues to between 445 
and 490 ppm but even 400 ppm might push the temperature up to 
the 2 degrees threshold. 5 

Over the last two decades governments have come to accept 
that global warming is a threat to much of humanity. The Stern 
report for the British government, for instance, concluded in 2006: 

All countries will be affected by climate change, but the poorest 
countries will suffer earliest and most. Average temperatures 
could rise by 5°C from pre-industrial levels if climate change 
goes unchecked. Warming of 3 or 4°C will result in many mil- 
lions more people being flooded. By the middle of the century 
200 million may be permanently displaced due to rising sea 
levels, heavier floods and drought. Warming of 4°C or more is 
likely to seriously affect global food production. Warming of 
2°C could leave 15 to 40 percent of species facing extinction. 6 

There was agreement as early as 1992 at the Rio Earth Summit on 
the need to start negotiations on measures to reduce emissions, 
and the Kyoto conference five years later produced a general 
framework for action. By 2007 even US president George W Bush 
backtracked and accepted the principle of global warming. 

The significant thing, however, is that such verbal agreement 
has not been translated into the sort of action likely to prevent the 
2 percent limit — or even higher figures — being reached. It took an- 
other four years after Kyoto before a conference in The Hague 
agreed on its implementation. The final agreement was "weak, un- 
enforceable and full of market loopholes". 7 It was not only that 
the US and Australia had refused to sign up. The European 
powers, who were supposedly keen on the agreement, did not keep 
within their targets. There was no reduction in the speed at which 
climate change gases continued to build up in the atmosphere. The 
Global Carbon Project reported a record 7.9 billion tonnes of 
carbon passing into the atmosphere in 2005, compared with 6.8 
billion tonnes in 2000; the growth rate of CO2 emissions from 
2000 to 2005 was more than 2.5 percent a year — in the 1990s it 
was less than 1 percent a year. 8 

The G8 meeting in Rostock in the summer of 2007 was paraded 
as the occasion when more decisive action would be forthcoming. 

The New Limits of Capital 


But declaring there was a major problem, the world's leaders post- 
poned even beginning to do anything about it for two years. And 
all they agreed to discuss at that date was an attempt to halve 
greenhouse gas emissions by 2050, whereas even an 80 percent cut 
in emissions would not be enough to guarantee keeping global 
warming below 2 degrees. 9 

Governments which have proclaimed averting climate change 
to be at the top of their agendas have proceeded to act as if the 
appearance of doing something was more important than the re- 
ality. Tony Blair spoke of climate change as the "most serious 
issue facing mankind". 10 His government committed to aim at a 
global figure of 666 ppm carbon dioxide equivalent (a fitting 
figure). Yet the Stern report commissioned by it estimated that 
with 650 ppm there was a 60 to 95 percent chance of 3°C of 
warming, and an Environment Department report in 2003 had 
found that with "with an atmospheric COi stabilisation concen- 
tration of 550 ppm, temperatures are expected to rise by between 
2°C and5 0 C". u 

Watching such behaviour is a bit like watching a car crash in 
slow motion, with the driver aware of disaster ahead but plough- 
ing on regardless. 

Competition, accumulation and climate change 

What explains this behaviour? The easy answer from part of the 
environmental movement has been "Greenwash", that is, govern- 
ments are simply pretending to care about the issue for reasons of 
popularity. That will be true of some politicians. But it does not 
explain the behaviour of all the major players in the system. Many 
of them, perhaps even most, have come to see that climate change 
will wreak havoc on the physical and biological environment that 
the system operates in and therefore on the system itself. They see 
the need to take action, yet are half paralysed when it comes to 
doing so. 

Neither is the paralysis explained simply by the pressure on the 
politicians by lobbying, bribery and blackmail by particular big 
corporations which fear a loss of profits from any shift away from 
carbon-based production and transportation. These corporations 
are often powerfully placed and could, for instance, delay even 
recognition of climate change by the US government for several 


The Runaway System 

years. But they have faced some opposition from other capitalist 
interests which do have a direct financial interest in trying to 
avoid climate change — the insurance corporations, for instance. 
What has to be explained is the relative ineffectiveness of these 

The issues go to the heart of the system as it is currently struc- 
tured. High levels of carbon-based energy are central to virtually 
every productive and reproductive process within the system — not 
just to manufacturing industry, but to food production and distri- 
bution, the heating and functioning of office blocks, getting labour 
power to and from workplaces, providing it with what it needs to 
replenish itself and reproduce. To break with the oil-coal economy 
means a massive transformation of these structures, a profound re- 
shaping of the forces of production and the immediate relations of 
production that flow out of them. 

Some people argue that such restructuring takes place all the 
time under capitalism, and that it is simply a question of gov- 
ernments encouraging it to go in one direction rather than 
another. This essentially was the case put by Clive Hamilton, de- 
fending the market approach of the Stern report in a polemic 
with George Monbiot: 

Stern is confident that once a powerful signal is sent to the 
market, then the market will find a way to carry out the re- 
structuring of the energy economy. There are reasons to believe 
that Stern is correct. In fifty years time the world will be dra- 
matically different: if a strong signal can be sent now, there are 
grounds for optimism. While we currently have the technologies 
to reduce the world's emissions sharply over the next decade or 
two, by 2050 the market — suitably guided — will present a set 
of possibilities we cannot foresee. 12 

What is ignored by such arguments is that even if governments do 
develop effective price mechanisms as signals to encourage invest- 
ment and production in one direction rather than another, they are 
signals that have to compete with other signals — those that come 
from the pressure to maintain profitability from existing carbon- 
energy intensive investment. 

An oil company may begin to establish divisions aimed at de- 
veloping carbon free or low carbon energy. But it will also seek 
to find profitable uses for its existing massive investment in 

The New Limits of Capital 


carbon intensive methods (pipelines, refineries, crackers, drilling 
equipment). The same goes for manufacturing and transporta- 
tion companies. They will stick with their existing heavy energy 
using equipment and buildings at last until they have more than 
covered the cost of their investment in them — and will invest in 
more of the same, unless the counter-signals from the govern- 
ments are very powerful. 

The behaviour of consumers cannot be changed by a mere 
wave of a price wand either. Price signals alone are not going to 
deal with the 10 percent of carbon dioxide produced by car 
journeys, or the 18 percent used in heating and lighting build- 
ings 13 — except possibly until temperatures have risen much 
above the 2 degree level. People are stuck with their existing, 
poorly insulated homes and patterns of dwelling and work that 
make them dependent upon car travel unless governments do 
much more than provide "signals". 

There is an even more assertive version of the argument about 
the capacity of capitalism to successfully reshape itself than that 
put by Hamilton. It holds that the complete restructuring of in- 
dustry to counter climate change would be beneficial to capitalism, 
since it would "create investment". The economic problem for 
capitalism in the 21st century is not, however, that there is some 
shortage of possible ways of investment. It is that such investments 
are not profitable enough. 

The system today, as we have seen in the previous chapters, is 
dominated by giant firms based in particular states but operating 
across several states and sometimes the system as a whole. Each 
firm is caught between the need to undertake big and expensive in- 
vestments in order to remain competitive and uncertainties about 
the profitability of such investments. Investing in new forms of 
energy or more energy efficient equipment and products is not 
going to overcome that contradiction. Indeed, doing so would 
make it worse for many firms, probably most. They can be relied 
on to pressurise states — and to threaten to relocate if necessary — 
to minimise price signals that clash with profitability. 
Governments themselves, identifying with nationally based accu- 
mulation, will resist anything that interferes with national 
competitiveness and go a fair bit of the way with the demands 
made by firms. This is why the "signals" are so weak, and why 
those who rely on influencing governments, like Stern, end up wa- 
tering down targets in order to make them seem "realistic". 


The Runaway System 

As George Monbiot says, "Sir Nicholas Stern spells out the 
dire consequences of two degrees of warming" but "then recom- 
mends a target for atmospheric concentrations of greenhouse 
gases of 550 parts per million" which would produce "at least a 
77 percent chance — and perhaps up to a 99 percent chance, de- 
pending on the climate model used — of a global average 
temperature rise exceeding 2°C" and "a 24 percent chance that 
temperatures will exceed 4°C". 14 

Stern was unwilling to advise cuts on the scale necessitated by 
his own calculations because "paths requiring very rapid emis- 
sions cuts" were "unlikely to be economically viable", as was any 
target lower than 550 ppm. 15 

The Obama election campaign in 2008 made many promises 
about dealing with climate change. Mainstream economists 
argued the recession itself provided an opportunity for doing so 
through the stimulus packages. But when the packages were pro- 
duced, the picture was rather different: 

The packages of tax cuts, credits and extra spending have been 
trumpeted for their environmental credentials by the govern- 
ments proposing them, but a closer look shows that green 
spending accounts for only a small part of the bigger initiatives. 
Much of the spending will go to projects that will, in fact, in- 
crease emissions, such as new roads or fossil fuel power 
stations, while too little money will be devoted to low-carbon 
projects to make a real difference, experts believe. For instance, 
Barack Obama, the US president, wants $27 billion (€21 bil- 
lion, £19 billion) to be spent on new roads, which will raise 
traffic emissions. Although some funds will be spent on devel- 
oping low-carbon vehicles such as electric or hydrogen cars, the 
benefits gained will be outweighed by the emissions generated 
by the extra petrol-driven cars. 16 

Todd Stern, the US president's new chief climate negotiator, 
claimed that it was "not possible" for the US to aim for 25 to 40 
percent cuts by 2020, despite the Intergovernmental Panel on 
Climate Change (IPCC) calculating that "developed nations 
should aim for 25 to 40 percent cuts by then to avoid dangerous 
climate change". 17 

In Britain "Green companies" were "in retreat, with a wave 
of staff layoffs and production cuts" with "Siemens, Clipper 

The New Limits of Capital 


Windpower and even BP among the big names. ..reacting to a 
slowdown in the clean energy sector". The "credit crunch" was 
"starving wind and solar developments of urgently needed 
cash" and the situation was "being exacerbated by prices crash- 
ing to record lows in the carbon trading market". 18 

None of this means that government "signals" have no effect at 
all. They are encouraging new areas of investment in things like 
wind and photoelectric power (but also in energy-absorbing 
biodiesel). New capitals — or innovative old capitals — are emerg- 
ing that will fight for more space and more resources for their 
wares. Emissions will probably rise less rapidly than otherwise, al- 
though it is unlikely they will decline in the short term. But the 
equivocation will persist with governments and industrialists pro- 
claiming their commitment to resist climate change one day and 
their determination to extract the maximum amount of oil or coal 
from the earth the next. 

The needs of capital and the needs of capitals 

The expansion of capitals in competition with each other — or as 
Marx put it, the self-expansion of capital — leads them to an orgy 
of carbon energy use just as they recognise it as self-destructive. 

The phenomenon of capitalism damaging its own environmen- 
tal basis is not completely new, even if it has never occurred on the 
scale it is today. In the early 19th century competitive accumula- 
tion in Britain led to a lack of concern about the physical health, 
even the physical survival, of capitalism's workers. It was a neglect 
that would inevitably be damaging to youthful industrial capital- 
ism as well as to the working class, since it threatened to exhaust 
the supply of fit and able labour power for exploitation. 

Marx summed up what was happening: 

The capitalistic mode of production (essentially the production 
of surplus value, the absorption of surplus-labour), produces 
thus, with the extension of the working-day, not only the dete- 
rioration of human labour power by robbing it of its normal, 
moral and physical, conditions of development and function. It 
produces also the premature exhaustion and death of this 
labour power itself. It extends the labourer's time of production 
during a given period by shortening his actual lifetime. 


The Runaway System 

But in doing so, capitalism shortens the "duration" of the "labour 
power" of the individual worker, so making it necessary to replace 
this more quickly than otherwise, so that: 

the sum of the expenses for the reproduction of labour power 
will be greater; just as in a machine the part of its value to be re- 
produced every day is greater the more rapidly the machine is 
worn out. It would seem therefore that the interest [of] capital 
itself points in the direction of a normal working day. 19 

Did this mean that capitalists flocked to campaign for shorter 
working hours and more humane conditions in the factories and 
working class localities? A few, more farsighted about the long 
term needs of capital as a whole, did. Most, however, campaigned 
against any restrictions on hours, even for children who would one 
day become more productive, adult, labour power. 
Again Marx summed up the capitalist logic at work: 

In every stockjobbing swindle everyone knows that some time 
or other the crash must come, but everyone hopes that it may 
fall on the head of his neighbour, after he himself has caught the 
shower of gold and placed it in safety. Apres moi le deluge! 
[After me, the flood] is the watchword of every capitalist and of 
every capitalist nation. Hence Capital is reckless of the health 
or length of life of the labourer, unless under compulsion from 
society. To the outcry as to the physical and mental degradation, 
the premature death, the torture of overwork, it answers: Ought 
these to trouble us since they increase our profits? 20 

It took concerted pressure on capital from the outside, by succes- 
sive acts of legislation enacted by the state — in part in response to 
workers' agitation — for the reproduction of labour power to be 
protected from the ravages of those who exploited it. It took some 
80 years before anything like fully adequate protection of such re- 
production was in place — and as we saw in Chapter Five it 
required the difficulties in military recruitment to bring home to 
the state the harm which capital had done to its cannon fodder by 
its lack of concern with supplies of labour power. 

Exactly the same logic as that described by Marx is found in the 
attitude of capital to the pumping out of climate change gases 
today. Capitalist politicians make beautiful speeches about the 

The New Limits of Capital 


need to do something, set up commissions and intergovernmental 
meetings, promise to reshape their own behaviour — and then bow 
down before interests which say that this or that measure to deal 
with climate change will be too costly for the economy to bear. 

However, there is one big difference between the tendency to 
destroy the source of labour power in the 19th century and the 
devastation of the Earth's climate today. The destruction of 
labour power was within the industrial areas of one country. It 
could be repaired by the importation of workers from the coun- 
tryside and Ireland. And eventually the national state could act to 
police the behaviour of individual capitalists in the interests of 
capital as a whole. 

There is no global state capable of enforcing its will on all the 
capitalist firms and national states that make up the system. Each 
is afraid that taking the drastic measures needed to massively 
reduce gas emissions will result in other firms and states seizing the 
opportunity to intrude on its markets. The issue of climate change 
becomes inextricably linked with the other struggles within the 
world system — the struggles between different nationally based 
capitalist interests, between national states and between classes. 

There will be more attempts at international agreements, per- 
haps with a few more teeth than in the past. It could hardly be 
otherwise as growing numbers of the system's capitals begin to 
experience the pain of climate change. But the agreements will 
always been riddled with weak spots because the different states 
will go into them with markedly different short and medium 
term interests. 

The national structures within which accumulation takes place 
depend to very different degrees upon carbon energy. The US was 
self-sufficient in oil until the early 1970s, its structures of accumu- 
lation and consumption became very highly dependent on oil and 
that means that today it has 20.2 tons of carbon emission per 
person; the main West European states lacked domestic oil re- 
sources, developed rather different structures of accumulation and 
consumption (with petrol, for instance, about three times the cost 
it is in the US), and have so far only 8.8 tons of emissions per 
person; China's rapid industrialisation and urbanisation are based 
on massive amounts of coal and its total emissions are close to that 
of the US figure, even though its emissions per head in 2004 were 
only a little over a sixth of the US figure and 40 percent of the West 
European figure. 21 


The Runaway System 

These enormous differences mean that measures that seriously 
cut back on emissions would hit firms based in different countries 
very differently. It is this which explains why the European Union 
seemed more committed to action against climate change in the 
early 2000s than the US: its national states stood to gain from mea- 
sures that would proportionately hit US-based industries more than 
their own. The US figure is immensely important. "International in- 
stitutions" for controlling the global system can only be effective 
insofar as their programmes coincide with the interests of the US- 
based capital, with its immense military power and financial 
influence. Regional powers like Russia, China, India or Western 
Europe might sometimes be able to block regulation in US interests, 
but they cannot substitute for it with regulation of their own. This 
applies as much to carbon gas regulation as to financial regulation 
through the IMF or trade regulation through the WTO. 
Recognition by those who run the various parts of the world system 
about the dangers of climate change will translate in practice to 
fraught international negotiations in which each major state will 
subordinate fighting climate change to the competitive interests of 
the capitals based within it. Regulation will continue to be slow, in- 
effective and insufficient to stop the destabilising effect of carbon 
gases, not only on the climate, but on the system as well. 

Some of the immediate short-term effects of climate change are 
already with us. The most immediately visible are those that result 
directly from rising temperatures: for instance, evidence that glac- 
iers are getting smaller, or that many species of birds in Britain are 
laying their eggs about a week earlier than in the 1950s. 22 Some of 
the most important effects will be less direct than these. Climate 
models suggest global warming causes shifts in ocean currents, in 
the amount of water vapour in the atmosphere and atmospheric 
pressures, and that these in turn lead to unexpected changes in 
weather patterns with, for instance, more frequent and more pow- 
erful storms on the one hand and droughts on the other. One 
cannot deduce from this that every short-term variation in the 
weather is a result of climate change, but the evidence is accumu- 
lating that both hurricanes and droughts are growing in frequency. 
If the global warming feedback mechanisms kick in, such local cat- 
astrophes will become much more frequent. There will be more 
crop failures, the flooding of rivers deltas and low lying land areas, 
more river inundations, more desertification of previous fertile 
areas, as well as shifts in patterns of cultivation. 

The New Limits of Capital 


Peak oil 

One other growing ecological limit to capitalism is, paradoxically, 
fear that the main source of carbon gases at the moment, petro- 
leum, may be running out. The notion of "peak oil" has been taken 
increasingly seriously — that the point may be at hand at which oil 
production cannot rise any further to meet growing demand. 

The issue first came into prominence back in 1998, after an arti- 
cle appeared in the Scientific American which predicted oil 
production would peak within ten years. Since then there have been 
rebuttals and counter-rebuttals, with various economists and geol- 
ogists presenting very different scenarios for what is happening to 
oil reserves and potential output. 23 The arguments have to a con- 
siderable extent reflected the impact of different interests. The giant 
oil firms tend to exaggerate the extent of the long-term supplies, 
since their share prices depend on these. Their figures then come 
under question from those worried about the long-term future of 
the energy needs of nationally based capitalisms as well as from 
muck-raking critics of the system as a whole. And there are consid- 
erable difficulties in coming to any exact conclusion as to the real 
picture because the big oil producing states conceal the real extent 
of their reserves as they bargain with each other within OPEC and 
with the oil companies. As one critical report points out: 

One of the big questions still waiting for an answer is the state of 
the oil production in the Kingdom of Saudi Arabia (KSA). Most 
likely, this issue will decide the timing of world peak oil.. . because 
of the secrecy surrounding the oil production in the KSA. 24 

But it is possible to draw two firm conclusions from the debate. 
First, peak oil is likely within the next quarter century, and may be 
reached within years rather than decades, forcing reliance on other 
energy supplies. The International Energy Agency, the OECD's 
energy organisation, long resistant to the peak oil argument, now 
accepts that there will be "an imminent 'oil crunch' in a few years 
time". 25 The Energy Information Administration (EIA) of the US 
Department of Energy concluded in July 2000 that "world con- 
ventional oil production may increase two decades or more before 
it begins to decline". But John Bellamy Foster points out, "The 
analysis itself, however... suggested that a world oil peak could be 
reached as early as 2021". 26 


The Runaway System 

Effectively, whichever set of figures one accepts, the blind ex- 
pansion of capital is close to exhausting the supply of its most 
important raw material, one on which almost all its production 
and consumption depend. Peak oil does not signify its immediate 
disappearance: it will continue to be available for many decades, 
but the cost of getting it will rise and the conflicts over who has it 
and who does not will get more intense. 

Regardless of when the peak will be reached, states are worried 
in the here and now about future "energy security". So there have 
been repeated reports in the US expressing such concerns, going 
right back to the infamous National Energy Policy report in May 
2001 drawn by a task force headed by vice-president Cheney. 
Without mentioning peak oil, it stressed concern about guaran- 
teeing US oil supplies and urged, "Make energy security a priority 
of our trade and foreign policy". 27 A February 2007 US 
Government Accountability Office report "argued that almost all 
studies had shown that a world oil peak would occur sometime 
before 2040 and that US federal agencies had not yet begun to ad- 
dress the issue of the national preparedness necessary to face this 
impending emergency". 28 

The term "energy security", like that of "defence", has a double 
meaning when used by governments. It can mean protecting the 
energy input of domestic and industrial use. But it can also mean 
operating policies that allow added pressure to be applied to other 
states. So, for instance, control over oil outflows from the Middle 
East, one of the goals of the US invasion of Iraq in 2003, is more 
about control over oil supplies which potential regional chal- 
lengers to US hegemony depend on than about the US's own 
supplies. Only about one eighth of these come from the region (as 
against three eighths from Canada, Mexico and Venezuela). 
Significantly, the US ensures it has bases or reliable allies at key 
points on international oil pipelines and oil routes — hence, for in- 
stance, the bitterness of its response to the Russian assertion of 
influence in the Georgia-South Ossetia war of August 2008. A 
world approaching "peak oil" is necessarily a world of heightened 
clashes between states and within states, just as the world of cli- 
mate change is. 

There is an inevitable interplay between the two. To some it 
might seem that peak oil, and the rising oil prices it will bring 
about, will act as a counter to climate change. There may be a 
limited downward pressure on oil consumption — as, for instance, 

The New Limits of Capital 


happened in the case of petrol consumption when oil prices shot 
up in middle of 2008. 29 But there is no automatic cancelling of 
one effect by the other. Peak oil is compatible with a level of con- 
sumption of oil as great as at present for many years, with a 
corresponding build up of carbon gases. Meanwhile energy secu- 
rity fears are leading to an intensified search for more oil, the 
expansion of the other carbon gas source, coal, and the use of 
maize or vegetable oils to produce ethanol and biodiesel for trans- 
port fuel processes which can even increase global carbon gas 
emissions. 30 

Food and capitalism 

The years 2006-8 provided a hint that capitalism is creating an- 
other ecological barrier to itself — that of not being able to produce 
enough food for those who live within it. Soaring food prices 
raised questions as to whether it was beginning to exhaust its ca- 
pacity to keep food production rising, as commentators pointed to 
rapidly declining rates of global food output growth. 31 

This was not the first time there have been such concerns. 
Malthus had argued in the early years of industrial capitalism that 
there was no point in raising the living standards of the mass of the 
population, since this would prompt them to have more children 
at a faster rate than food production would rise to feed them. 
Marx and Engels rejected this view that a natural barrier to human 
welfare existed as an apology for exploitation by a defender of the 
system. But they did hold, as we have seen in Chapter Three, that 
capitalism itself created obstacles to food provision once it had de- 
veloped beyond a certain point. This was because capitalist 
agriculture removed the nutrients necessary for fertility from the 
soil more rapidly than it replaced them. 32 

Marx and Engels did not put the issue at the centre of their 
analysis of capitalism for the simple reason that they could see that 
by the 1860s and 1870s the system was capable of substituting for 
the depredations of agriculture in its old established lands by the 
production of foodstuffs in North America, with the opening up 
of the prairies to agriculture. The issue became of marginal con- 
cern to most Marxists after their death because the use of mineral 
fertilisers was able to compensate for the loss of natural nutrients. 
Worldwide food production kept ahead of population growth 


The Runaway System 

right through to the end of the 20th century. There were horrific 
famines and persistent long-term malnutrition for hundreds of 
millions of people, but these were a result not of under-production 
but of class-induced poverty. Signs of impending absolute food 
shortages in South and East Asia in the 1960s were overcome by 
the "Green Revolution" — the introduction of new grain types de- 
pendent on big inputs of fertiliser and increased irrigation. These 
were normally combined with the spread of various forms of cap- 
italist agriculture in place of the subsistent peasant farmer. 

The increases in food yields were very real — it is stupid of some 
"organic" critics of modern agriculture to claim otherwise — with 
wheat yields growing between 3 and 4 percent a year between the 
mid-1960s and the mid-1980s, and rice yields between 2 and 3 
percent. But over the last two decades the increases have fallen 
until they are barely ahead of (declining) population growth: 
"Output from the Green Revolution has reached a 'plateau'". 33 
Ever greater quantities of fertiliser are required to increase output, 
water sufficiency becomes a growing problem, concentration on a 
very narrow range of crop types increases the dangers from plant 
diseases, and world acreage devoted to food is not growing. As a 
World Bank Development Report admits: 

Many agriculture-based countries still display anaemic per 
capita agricultural growth and little structural transforma- 
tion... The same applies to vast areas within countries of all 
types. Rapid population growth, declining farm size, falling soil 
fertility, and missed opportunities for income diversification and 
migration create distress as the powers of agriculture for devel- 
opment remain low. 34 

The problem is not that somehow, after 200 years, Malthus has 
been vindicated. Means exist to raise food output to cope with 
world population, expected to grow another 50 percent and then 
slowly decline. The problem is the existing "structure of agricul- 
tural accumulation". 35 Global agriculture since the mid-1970s has 
been increasingly structured by a handful of agribusiness corpo- 
rations, mainly based in the US, that control agricultural 
innovation, supplying the inputs (seed varieties, fertilisers, pesti- 
cides, agricultural machinery) for the world's farmers, big and 
small. Their interest is in keeping those inputs standardised (so 
keeping down their own costs of production), with as little regard 

The New Limits of Capital 


for particular local growing conditions as possible. Their research 
has "focused on innovations that reduced costs rather than en- 
hanced yields". 36 The result has been little in the way of 
innovation to suit the needs of the world's 400 million small 
farmers — except to preach GM crops as a magic solution, regard- 
less of their potential side-effects on local ecologies and the 
inapplicability of those so far developed to conditions in very 
wide parts of the world. Meanwhile, individual developing coun- 
tries have reduced agricultural investment to around 4 percent of 
GNP compared with 10 percent in 1980. 37 Yet, as Ronald Trostle 
of the US Department of Agriculture's economic research unit 
says, "it was always publicly funded research that was more likely 
to concentrate on innovations that would increase yields and pro- 
duction, particularly in parts of the world where farmers are 
unable to pay royalties for new varieties of seeds". 38 

The dangers to the world's food supply were brought home 
sharply in 2007-8 when grain prices internationally surged, creat- 
ing the risk of starvation for hundreds of millions of people. Rising 
food prices were hurting many of those small farmers who bought 
as well as sold food. "Food security" suddenly joined energy secu- 
rity as a concern for governments. In the short term the ability of 
farmers in Europe and North America to cultivate land which had 
been left idle under "set aside" schemes raised the possibility of 
filling some of the gaps in the global food supply and there were 
limited falls in some prices by the beginning of 2009 — although 
not to the level of two years earlier. 

The crisis was more likely to be an omen for the future — the 
threat of immense hardship to hundreds of millions of people — 
than the immediate onset of global catastrophe. 39 The "real risk" 
remained of a "food crunch at some point in the future, which 
would fall particularly hard on import-dependent countries and 
on poor people everywhere", reported one study. 40 Indications 
were that the food price rises of 2006-8 had not simply just been a 
result of speculation during the last phase of the mid-2000s boom. 
Early in 2009 a report could tell how "food prices are poised to 
rise again" as long-term "resource scarcity trends, notably climate 
change, energy security and falling water availability", would put 
pressure on prices and production. 41 

The food shortage of 2008 showed the way in which the dif- 
ferent elements of crisis endemic to capitalism in the 21st century 
can interact with each other. For the shortage was not just as a 


The Runaway System 

result of the exhaustion of the benefits of the Green Revolution. It 
was also a product of the probable effects of climate change, with 
crop failures in Australia due to drought and in Europe due to 
flooding; of the typically perverse capitalist way to offset climate 
change and energy security by devoting a third of the US maize 
crop and half the European oil seed crop to the production of bio- 
fuels; 42 of the rising oil price, which forced up the costs of 
fertilisers and fuels on which 21st century farming depends; and 
of the sharpness of the boom part of the capitalist cycle in the 
early and mid-2000s, which massively increased middle class 
meat consumption, especially in China. 

It is the sort of interaction of the economic, the environmental 
and the political we should expect to see repeated again and again 
in the 21st century, producing recurrent, very deep social and po- 
litical crises that frame the choice between global catastrophe and 
revolutionary change. 

The New Limits of Capital 



The Runaway System and 
the Future for Humanity 

Anthony Giddens published a book with a strange title in 1999 at 
the high point of illusions in globalisation and the "new economic 
paradigm". He was (and still is) Britain's best know academic ad- 
vocate of the "third way" that ditches old social democratic 
attempts to tame capitalism and was aptly described as "Tony 
Blair's court sociologist". 1 Yet the title was The Runaway World. It 
conveys the image of a bolting horse, which governments, social 
movements and individuals alike cannot stop but have to try to 
balance on precariously. The best they can do is to try to influence 
where it is taking them by spurring it on with investments in social 
capital on the one side and reining it in with cutbacks in welfare 
expenditures on the other. Yet the succession of crises and wars 
that have punctuated the last four decades show the futility of such 

The runaway world is, in fact, the economic system as Marx de- 
scribed it, the Frankenstein's monster that has escaped from human 
control; the vampire that saps the lifeblood of the living bodies it 
feeds off. Its self-expansion has indeed led it to encompass the 
whole globe, drawing all of humanity into its cycles of competing in 
order to accumulate and accumulating in order to compete. 

Its expansion has been marked, as much in the 21st century as 
in the mid- 19th century when Marx did his research for Capital, 
by fits and starts, by frenzied forward motion suddenly interrupted 
by deep crises. Running through the cycles of expansion and re- 
cession has been the other feature Marx pointed to: downward 
pressure on profitability causing capitalists to try to cut back on 
wages and welfare benefits at the same time as pressuring people 


to work harder, even though in doing so this cuts into the market 
for consumer goods produced by other capitalists. We have seen 
how these elements came together to produce the great slump of 
the inter- war years, renewed crisis in the mid-1970s, and the long 
drawn out Japanese crisis of the 1990s. We saw also how they pro- 
duced the debt economy bubble culminating in the great crash of 
2007-9. We will see this happen again repeatedly, in one form or 
other, in the decades ahead. 

In some important ways, the system is even more chaotic than 
in Marx's account. The very size of the units that make it up means 
that it has lost some of its old flexibility. The destruction of some 
capitals through periodic crises which once gave new life to those 
that remained now threatens to pull these down as well. Life sup- 
port systems provided by the state may be able keep the system 
from complete collapse but cannot restore it to long-term vigour. 
At best they provide a feverish spell of brief exhilaration before yet 
another collapse. And the cost of providing the life support sys- 
tems sooner or later stretches the resources of the state close to 
breaking point. 

Modern states are creatures of the capitalist system, evolving 
to service the needs of the geographical clusters of capitals that 
constitute it. The more these clusters depend on their relations 
with the rest of the global system, the more they need the power 
of states to provide for their interests within it. Yet each state 
can only achieve this goal by pressurising other states, and in 
the process adding to the instability of the system as a whole. 
The measures national states take to aid the capitals based 
within them during a crisis necessarily infringe on the interests 
of capitals based in other states, increasing the instability still 
further. Their significance is not limited to a particular eco- 
nomic crisis. They provide a foretaste of what the rest of the 
21st century is going to be like. 

Capitalism is a restless system. Whether in boom or slump, in 
peace or war, in a great city or the remote countryside, it never 
stands still. Competitive accumulation remoulds everything it 
touches and then, when it has hardly finished, remoulds it all 
again. The very speed of change itself has enormous importance. It 
means that the relative economic weights of the different states 
within which the units of capital are based are continually in flux, 
just as the states have to try to intervene to protect their capitalists 
from the recurrent convulsions of the global system. 


The Runaway System 

The problem is acute for the US, at the top of the global hierar- 
chy. Its position had depended on its being the policeman for the 
whole system, offering general protection, Mafia style, to the other 
ruling classes, while using that position to privilege the position of 
US based capitals. Crises make those capitals need that privileged 
position more than ever. The failures in the "war on terror" meant 
that already in the mid-2000s other states felt more empowered to 
challenge such privilege, shown by China's increased sway in 
Africa, Russia's in parts of the former USSR, and the BRICS in 
global trade negotiations. Then came the crisis that began in 2007 
with widespread predictions that it would dent US global hege- 
mony even more just as many of its great corporations looked to 
that hegemony to help them out. 

US imperialism might be temporarily chastened as it contem- 
plated the way in which some of its recent adventures have 
rebounded to its disadvantage — just as the Vietnam War did. But it 
can not abandon its global position, even if defending it leads to 
further assertions of military might in other poorer countries, with 
devastating and destructive consequences. Increased troop deploy- 
ments were meant to ensure the retreat from Iraq did not turn into 
rout in Afghanistan. Significantly, Barack Obama's first budget in- 
creased, rather than decreased, military expenditure. And so did 
the budgets announced in the same month for Russia and China. 
The bloody road which led from Korea to Vietnam and from 
Vietnam to Iraq is not yet at an end. 

But that is not all. The "new", environmental, limits of capital 
will react back upon its old economic limits. Climate change, peak 
oil and global food shortages will add to the overall economic insta- 
bility of the system expressed in the boom-bust cycle, the downward 
pressure on the rate of profit and the flows of capital from industry 
to industry and country to country. We had a glimpse of this in the 
first half of 2008. Rising food and energy prices produced an infla- 
tionary surge which added to government difficulties in dealing with 
the credit crunch at the same time as causing protests, riots and 
strikes in a score of countries. We can expect many more clashes 
within and between states as problems of food security and energy 
security lead to shifts in surplus value from some sections of capital 
to others and provoke popular outrage. And all the time climate 
change tipping points can suddenly impact unexpectedly on hun- 
dreds of millions of people's lives, in much the same way that 
economic crises and wars do, but even more destructively. 

The Runaway System and the Future for Humanity 


The starkest recognition of the possible consequences came 
from the US Department of Defence, the Pentagon, at the time 
when the official position of the US government was still to refuse 
to recognise the reality of climate change. It warned of the danger 
of "food shortages due to decreases in net global agricultural pro- 
duction", "decreased availability and quality of fresh water in key 
regions due to shifted precipitation patterns, causing more fre- 
quent floods and droughts", and "disrupted access to energy 
supplies due to extensive sea ice and storminess". 

The outcome, as it saw it, would be an increased occurrence of 
resource wars and civil wars: 

As global and local carrying capacities are reduced, tensions 
could mount around the world, leading to two fundamental 
strategies: defensive and offensive. Nations with the resources 
to do so may build virtual fortresses around their countries, pre- 
serving resources for themselves. Less fortunate nations, 
especially those with ancient enmities with their neighbours, 
may initiate struggles for access to food, clean water, or energy. 
Unlikely alliances could be formed as defence priorities shift 
and the goal is resources for survival rather than religion, ideol- 
ogy, or national honour... 

There would be "an increasingly disorderly and potentially vio- 
lent world". 2 

This will be disorder in a world in which eight of the biggest 
states possess nuclear weapons that are targeted at others, scores 
have "conventional weaponry" much more destructive and hor- 
rific than that of the Second World War, and proliferating civil 
nuclear energy can provide conventional weapons with deadly tar- 
gets. The runaway system threatens more than devastating 
periodic slumps and horrific wars. It puts into question the very 
possibility of sustaining human life on Earth. The system of alien- 
ated labour is approaching its highest point of destructiveness. The 
question is whether those who produce that labour are capable of 
seizing control of its wealth and subjecting it to conscious control. 


The Runaway System 


Who Can Overcome? 

The decisive question 

We live in a system which is unstable, which breeds economic 
crises and wars, and which is eating up the very environmental 
basis it stands on. This is going to lead its component national sec- 
tors into repeated social and political crises in the course of the 
21st century. Just as the 20th century was a century of wars, civil 
wars and revolutions, so too is the 21st century. But this leaves 
open a decisive — the decisive — question. What forces exist that are 
capable of taking on the system and transforming the world? 

For classical Marxism, the answer was simple. The growth of 
capitalism was necessarily accompanied by the growth of the class 
it exploited, the working class, and this would be at the centre of 
the revolt against the system. It was not the first exploited and op- 
pressed class in history. But it differed from the 200 or so 
generations of peasants and slaves that preceded it in very impor- 
tant respects. Capitalist exploitation was concentrated in huge 
workplaces in giant industrial conurbations, giving the working 
class power at decisive points in the society in which it found itself. 
Such exploitation tended to produce homogeneity in the condi- 
tions of its members as capital repeatedly reduced different forms 
of concrete labour to abstract labour. And capital required an ex- 
ploited class that has a level of culture — of literacy, numeracy and 
knowledge of the world at large — greater not merely than preced- 
ing exploited classes, but also than most preceding ruling classes. 
These factors combined to create the potentiality for it to take con- 
trol of society as a whole into its own hands in a way that was not 
true of its predecessors. 

But potentiality was not actuality. The development of capital- 
ism was not a simple smooth upward process that had its impact 
on the exploited class it created. There was unevenness over time, 


with the concentration of workers into centres of exploitation 
during booms and the expulsion of some from those centres 
during slump. There was geographic unevenness, with some cen- 
tres arising in connection with national states before others, and 
then sometimes declining as new centres supplanted them. These 
forms of capitalist unevenness led to unevenness within the work- 
ing class, with different levels of skill and payment arising, with 
competition for jobs and security of employment between differ- 
ent groups of workers, with sections of workers identifying with 
the particular state that controlled them because it seemed like a 
locus for achieving reforms of the system. Nevertheless, for classi- 
cal Marxism, this was a class which would be driven to unite 
periodically by the very pressures of the system upon it. Skill dif- 
ferentials which had arisen at one point would be eroded at 
another. Competition between workers would fade as they fought 
together to achieve overriding common goals. National ideologies 
would lose their hold in the face of the horrors of imperialist wars. 

This notion, that the working class provides the agency that can 
change society, has been challenged even more than Marx's ac- 
count of the economic dynamic of the system. Marx was a brilliant 
economist and a pioneering sociologist, the argument goes, but fell 
into an apocalyptic vision of the future which ascribed a meta- 
physical role to the working class. The spread of modern 
capitalism, the argument continues, has not been accompanied by 
the growth of the working class, the conditions of those workers 
that do exist have not been homogenised, and they do not develop 
a consciousness in opposition to the system. 

Such contentions were already very widespread during the 
long post-war boom. As a notable sociological study of British 
workers told: 

A major and recurrent theme — and most notably in liberal quar- 
ters — [was] that of the incipient decline and decomposition of 
the working class. As the development of industrial societies 
continued, it was suggested, the working class, understood as a 
social stratum with its own distinctive ways of life, values and 
goals, would become increasingly eroded by the main currents 
of change. The very idea of a working class had been formed in, 
and in fact belonged to, the infancy of industrial society: in the 
era to come it would steadily lose its empirical referent. Social in- 
equalities would no doubt persist; but these would be modified 


The Runaway System 

and structured in such a way that the society of the future would 
be an overwhelmingly "middle-class" society, within which the 
divisions of the past would no longer be recognisable. 1 

So pervasive were these arguments that they influenced the think- 
ing of radicals such as the American sociologist C Wright Mills 2 
and revolutionaries like Herbert Marcuse, 3 while fashionable soci- 
ologists generalised the argument about "post-industrial society" 
to the advanced countries as a whole. They all looked rather fool- 
ish when French workers undertook the biggest general strike in 
history so far in May 1968 and waves of industrial struggle swept 
through Italy, Britain, Argentina, Spain and Portugal in the years 
1969-75. Yet the argument revived in the 1980s and 1990s as the 
restructuring of capitalism through crisis decimated many old es- 
tablished sectors of the working class and industrial defeat led to a 
waning of class combativity. 

Ernesto Laclau and Chantal Mouffe were swimming with the 
tide of intellectual opinion when they asserted in an influential 
work in the mid-1980s, "It is impossible today to talk about the 
homogeneity of the working class and to trace it to a mechanism 
inscribed in the logic of capital accumulation". 4 So too were 
Michael Hardt and Antonio Negri when they claimed in 2000 that 
"the industrial working class" had "all but disappeared from view. 
It has not ceased to exist, but it has been displaced from its privi- 
leged position in the capitalist economy". 5 

Yet, not for the first time, the common sense among philoso- 
phers has departed from empirical reality. A detailed study of the 
world's workforce in the mid-1990s by Deon Filmer calculated 
that of 2,474 million people who participated in the global non- 
domestic labour force, 889 million worked for wages or salaries, 
1,000 million people mainly for their own account on the land, 
and 480 million for their own account in industry and services. 6 
Probably about 10 percent of those employed will have been 
members of the new middle class who receive more value than 
they create in return for helping to control the mass of workers. 7 
This means there were around 700 million workers, with about a 
third in "industry" and the rest in "services". The total size of the 
working class including their dependants and those who have re- 
tired must have been between 1.5 and 2 billion. More recent 
figures from the United Nations Development Programme suggest 
a global total for those in industry substantially higher than 

Who Can Overcome? 


Filmer's. 8 Anyone who believes we have said "farewell" to this 
class is not living in the real world. 

Marx made a distinction between a class which exists in itself, 
as an objective element in the social structure, shaped by the rela- 
tions of people to the means of making a livelihood, and a class for 
itself, with a consciousness of its position and of its interests in op- 
position to those of another class. The key conclusion to draw 
from all the figures is that the working class exists as never before 
as a class in itself, with a core of perhaps 2 billion people, or a 
third of the global population. On top of this there are very large 
numbers of peasants, up to 50 percent, who do some wage labour 
and so are subject to much of the same logic of the system as the 
workers. The global proletariat and semi-proletariat combined are 
the majority of the population for the first time in history. 

But we need to go beyond these general figures if we are to 
grasp the potential for the world's workers to challenge the system. 
It is necessary first to look how changes in the system are changing 
different sectors of workers. 

The "advanced" countries: the effects of restructuring 

The repeated restructuring of production means that the working 
class in the advanced countries today is different in many respects 
to that 40 or 50 years ago. But this does not justify the claim that 
the working class has disappeared as a result of "deindustrialisa- 
tion", the "post-industrial society", or the "weightless economy". 

Take, for instance, the world's biggest single economy, that of 
the US. There was much panic about "deindustrialisation" in the 
1980s in the face of challenges to US industrial pre-eminence in 
fields like car production and computers. But in 1998 the number 
of workers in industry was nearly 20 percent higher than in 1971, 
roughly 50 percent higher than in 1950 and nearly three times the 
level of 1900. Baldoz, Koeber and Kraft noted at the beginning of 
this century, "More Americans are now employed in making cars, 
buses and parts of them than at any time since the Vietnam War". 9 

Even after the recession of 2001-2 had led to a massive ratio- 
nalisation of industry, with the loss of about one in six 
manufacturing jobs, the industrial working class had far from dis- 
appeared. Industrial production in 2007 was 8 percent higher than 
in 2000 and 30 percent higher than in 1996, 10 and the US remained 


The Runaway System 

the world's biggest single centre of manufacturing, with a fifth of 
world output (the combined old European Union of 15 states was 
ahead with a quarter), 11 despite much talk of manufacturing 
moving to the Third World in its entirety. 

The Japanese figures were even more astounding. The industrial 
workforce more than doubled between 1950 and 1971 and was 
another 13 percent higher in 1998. The fall in industrial employ- 
ment in a number of countries over the last three decades does not 
signify deindustrialisation of the whole of the old advanced indus- 
trial world. It had 112 million industrial jobs in 1998 12 — 25 
million more than in 1951 and only 7.4 million less than in 1971. 
Toni Negri's Italy may not have been in the same league as the US 
or Japan, but industrial workers had certainly not disappeared. 
There were 6.5 million in 1998, down only one sixth since 1971. 13 

These figures for industrial employment, it should be added, un- 
derestimate the economic importance of industry in general and 
manufacturing in particular. As Bob Rowthorn has rightly noted: 

Almost every conceivable economic activity in modern society 
makes use of manufactured goods... Many of the expanding 
service industries make use of large amounts of equipment. 14 

The small decline in the total industrial workforce is not because 
industry has become less important, but because productivity per 
employee in industry has risen more quickly than in "services". 
Slightly fewer manufacturing workers are producing many more 
goods than three decades ago. 15 The industrial workers are as im- 
portant for the capitalist economy today as in the early 1970s. 
Glib statements like those of Hardt and Negri about their declin- 
ing significance could not be more wrong. 

The usual distinction between "industry" and "services" ob- 
scures more than it reveals. "Services" is a catch-all residual 
category of everything that does not fit into the sectors of industry 
and agriculture. So some of the shift from "industry" to the "ser- 
vice sector" amounts to no more than a change in the name given 
to essentially similar jobs. Someone (usually a man) who worked a 
typesetting machine for a newspaper publisher 30 years ago would 
have been classified as a particular sort of industrial worker (a 
"print worker"); someone (usually a woman) working a word 
processing terminal for a newspaper publisher today will be clas- 
sified as a "service worker". But the work performed remains 

Who Can Overcome? 


essentially the same, and the final product more or less identical. 
Rowthorn undertook a statistical breakdown of the total "ser- 
vice" category for the OECD as a whole. There was a small fall in 
"total goods and goods-related services" — from 76 percent of all 
employment in 1970 to 69 percent in 1990. 16 But this was certainly 
not a revolutionary transformation in the world of work. 

There are many other jobs characterised as "services" that are 
essential to accumulation in the modern world — especially, as we 
saw in Chapters Five and Seven, health provision and the educa- 
tion service. Today there are over 10 million employed in health 
and educational services in the US (around one in 13 of the work- 
force), and US capitalism could not function without them. And 
the long-term trend is for most of them to be forced increasingly 
into conditions comparable to those of industrial and routine 
office workers, with payment by results, assessment and appraisal 
systems, increased concern with timekeeping, and enhanced disci- 
pline codes. 

There is the myth that the "service" sector workforce is made 
up of well paid people with control over their own working situa- 
tion who never need to get their hands dirty. So Guardian 
columnist Polly Toynbee writes: 

We have seen the most rapid change in social class in recorded 
history: the 1977 mass working class, with two thirds of 
people in manual jobs, shrunk to one third, while the rest mi- 
grated upwards into a 70 percent home-owning, white collar 
middle class. 17 

If Toynbee had looked at the Office for National Statistics' Living in 
Britain 2000 she would have found 51 percent of men and 38 per- 
cent of women in its various "manual" occupational categories. 18 
This is because the "service industries" include refuse workers, hos- 
pital ancillary workers, dockers, lorry drivers, bus and train drivers, 
and postal workers. Alongside them are a huge number of women — 
50 percent — in the "intermediate and junior non-manual" 
categories, where wages are typically lower than in most manual oc- 
cupations and working conditions often at least as hard. In the US in 
2001, 50 percent of the 103 million employees in service related oc- 
cupations had manual or routine clerical or similar jobs. 19 Together 
with the 33 million workers in traditional manual industries they 
made up three quarters of the country's workforce. 


The Runaway System 

Two related processes are taking place in all "advanced" 
economies (and many "non-advanced" ones). The traditional 
manual working class is put under more and more pressure as cap- 
ital tries to squeeze its directly productive labour so as to get more 
profits from it. At the same time, the new "non-goods-producing 
service" working class is subject to proletarianisation as capital 
sets out to reduce the costs to it of non-productive and indirectly 
productive functions. 

Each crisis in the last four decades has involved sudden in- 
creases in unemployment — in some cases permanent — and the 
wiping out of old established centres of production (factories, 
docks, mines, etc). Capital and its apologists have then tried to 
take advantage of workers' feelings of insecurity to remould their 
lives around its own continually changing requirements. Its slo- 
gans have become "flexibility" in labouring time, methods of 
work and labour markets, all justified by the claim that "lifetime 
employment belongs to a past age". Much academic research has 
accepted its message, and "Third Way" social democrats and those 
on the "autonomist" left have taken it for an unquestionable 
truth. Typical — and excessively influential — is the sociologist 
Manuel Castells who argues there is: 

Structural unstability [sic] in the labour markets everywhere, 
and the requirement for flexibility of employment, mobility of 
labour, and constant reskilling of the workforce. The notion of 
the stable, predictable, professional career is eroded, as rela- 
tionships between capital and labour are individualised and 
contractual labour conditions escape collective bargaining. 20 

The claim about the ability of capitalism to destroy industrial jobs 
instantaneously is a vast exaggeration of what is happening with 
restructuring. As we have seen in Chapter Ten it takes time and 
effort for capital to liquidate industrial investment in one part of 
the world and shift it to another — and new investment is still pre- 
dominantly within the triad of the advanced countries, although 
the emergence of China as a manufacturing centre is adding a new 
twist to that pattern. Even in the electronics industry, in which 
components and most final products are very light and cheap to 
move, there was not an unambiguous move from centralised pro- 
duction in the advanced countries to contracting out in the Global 
South in the 1990s and early 2000s: 

Who Can Overcome? 


Although the proportion of production beyond the Triad of 
Europe, North America and Japan was high, and was indeed as- 
sociated with international rather than local markets, it was 
confined to a few East Asian countries. At the same time, the 
"domestic" production workforce in the US continued to grow. 21 

In general, capital still finds it more profitable to locate itself in the 
regions which had industrialised by the mid-20th century. Workers 
may usually be better paid there, but a combination of established 
skill levels and existing investments in plant and infrastructure 
means they are also more productive, providing much more sur- 
plus value for the system than most of their poorer brothers and 
sisters in the Third World. This explains why the picture for most 
of Latin America in the 1990s was one of very slow average 
growth or stagnation, and for most of Africa of absolute decline. 

The most important impact of offshoring and rising imports has 
not been their role in destroying jobs, but in helping employers to 
destroy workers' confidence in their capacity to defend conditions, 
wages and working hours. 

A study by Kate Bronfenbrenner found that during the eco- 
nomic upturn of the 1990s American workers felt more insecure 
about their economic future than during the depths of the 1990- 
1 recession. "More than half of all employers made threats to 
close all or part of the plant" during union organising drives. But 
afterwards "employers followed through on the threat and shut 
down all or part of their facilities in fewer than 3 percent" of 
cases. 22 In other words, it is in the interests of employers to 
overemphasise how precarious jobs are in order to demoralise 
workers and lower the level of resistance. Those voices on the left 
who exaggerate that insecurity can add to that demoralisation, 
rather than countering it with a recognition of the counter-factors 
that provide workers with continued strength if they have the 
confidence to deploy it. 

The evidence does not justify a picture of a uniform, relentless 
spread of precarious jobs. The crisis of the early 1990s did cause a 
substantial increase in "precarious" jobs in Western Europe. But 
that still left 82 percent in permanent jobs, as against only 18 per- 
cent in non-permanent jobs — a proportion that remained almost 
unchanged between 1995 and 2000. There has been a huge varia- 
tion between countries, 23 but a 2001 ILO study of Western Europe 
as a whole concluded that: 


The Runaway System 

The evidence simply does not sustain the view that we are wit- 
nessing the emergence of a "new" kind of employment relations, 
seen in the "end of the career" and the "death of the permanent 
job for life". 24 

One survey in 2000 showed only 5 percent of British employees 
on temporary contracts, 25 while the number of people who had 
worked at the same workplace for more than ten years had risen 
from 29 to 31 percent. 26 Even in Spain, which has the highest 
level of "precariety" in Europe, 65 percent of workers have per- 
manent jobs. 

Capital cannot manage without workers who have certain skills 
and it prefers workers who have some sense of responsibility for 
the job. It takes employers time to train people and they are rarely 
keen to lose them if they can avoid it. They therefore do not 
always treat workers as "disposable", even when it comes to semi- 
skilled and unskilled labour. They can benefit from a generalised 
insecurity making the majority of workers with relatively secure 
jobs fear that they may lose them. But that does not mean that cap- 
ital can really dispense with such workers. And that means they 
have the potential to put up resistance to its demands, even if they 
are often not aware of it. 

The new working classes of the "Third World" 

Around 60 percent of the world's industrial workers are outside 
the "advanced" countries of the OECD, with perhaps 25 percent 
in China, about 7 percent in India and around 7 percent in Latin 
America. 27 Such statistics do no more than provide a snapshot of 
the enormous change brought about by the sweep of capitalism's 
self-expansion across the world. 

Sixty years ago 80 percent of the world's population lived in the 
countryside; and 30, 40, or even 50 percent worked on the land 
even in countries thought of as "advanced" like France, Italy or 
Japan. Today close to half the world's population live in towns and 
cities, and the urban population is a majority even in countries 
people often think of as rural — 84 percent in Brazil, 76 percent in 
Mexico, 63 percent in Ecuador and 63 percent in Algeria. 28 

Urbanisation and the spread of market relations are not neces- 
sarily the same as the growth of wage labour. 29 People worldwide 

Who Can Overcome? 


have been leaving the countryside at a much greater rate than the 
growth of stable livelihoods for them in modern sectors of the 
economy. This is especially true in countries where economic 
growth is slow or negative. Thus wage employment fell in absolute 
terms in several African countries during the 1980s, 30 and half the 
non-agriculture workforce of Africa is self-employed. 31 Even in 
China, with its rapid rate of accumulation, the employed working 
class has expanded more slowly than economic growth. 32 But in 
general, the slowness of job growth should not be identified with 
"deindustrialisation". 33 

There has been growth of wage labour in much of the Global 
South but it has been spasmodic, a product of the chaotic ups and 
down of capitalist industrial growth. And in very many cases, any 
growth in modern industry with "formal" employment has been 
overshadowed by what has been happening in the "informal" 
sector of very small businesses. The joint share of informal and 
small business activities of non-agricultural employment in Latin 
America as a whole rose from 40 percent in 1980 to 53 percent in 
1990, 34 while in Brazil half the occupied urban population were 
not "formal employees", although more than half of the informal 
workforce were wage workers. 35 

In India growth has been even more concentrated in the in- 
formal "unorganised" sector, without workplace rights, while 
40 percent of the urban population is self-employed — working 
in family businesses, usually without their own premises, or as 
vendors, rickshaw drivers, cart pullers and the like. 36 In China 
too the informal sector has mushroomed — with the number of 
urban workers not officially classified and doing things "in the 
informal sector (such as street vending, construction, and 
household services)" growing by 79 million between 1995 and 
2002. By 2002 they amounted to 40 percent of urban employ- 
ment. 37 In addition to — and often merging into — those in the 
informal sector, there are everywhere those denied any opportu- 
nities for employment by modern capitalism: the unemployed 
who typically make up 10 percent or more of the workforce in 
Third World cities. 38 

The failure of regular employment in the cities to absorb the 
vast influx of labour from the countryside follows from the logic 
of capitalism. Competition on a global scale has caused capitalists 
to turn to "capital intensive" forms of production which do not re- 
quire massive numbers of new workers. 


The Runaway System 

Marx described very well the process by which the informal 
sector grows, looking at British society 150 years ago: 

...The additional capital formed in the course of accumulation 
attracts fewer and fewer labourers in proportion to its magni- 
tude. The old capital... repels more and more of the labourers 
formerly employed by it. 39 

This dynamic produces a "stagnant" component of "the active 
labour army" with "extremely irregular employment": 

Its conditions of life sink below the average normal level of the 
working class; this makes it at once the basis of special branches 
of capitalist exploitation... characterised by maximum of work- 
ing time, and minimum of wages... Its extent grows, as with the 
extent and energy of accumulation the creation of surplus-pop- 
ulation advances. 40 

In general, the suffering of a very large chunk of the urban masses 
in Third World countries comes not from being super-exploited by 
large capital, but from the fact that large capital does not see a way 
of making sufficient profits out of exploiting them at all. This is 
most clearly the case in much of sub-Saharan Africa. After squeez- 
ing wealth out of the continent during the period from the onset 
of the slave trade to the end of empire in the 1950s, those who run 
the world system (including local rulers who move their own 
money to Europe and North America) are now prepared to write 
off most of its people as "marginal" to their requirements — except 
in the all-important local enclaves where raw materials, especially 
oil, are to be found. 

The relation of the formal and informal sectors 

The unevenness of industrial expansion and the mushrooming of 
the informal sector can lead to conclusions about the incapacity of 
workers to organise and fight that very much parallel the ortho- 
doxies about "precariousness" in the old industrial countries. It is 
assumed on the one hand that those workers with stable jobs in 
the formal sector are privileged labour aristocrats — as one report 
on north east Brazil puts it, to "be formally employed is almost a 

Who Can Overcome? 


privilege, since less than half of those who want such a situation 
are in fact 'enjoying' it". 41 At the same time it is assumed that those 
in informal sectors suffer from "social exclusion" and are not ca- 
pable of self-organisation. 

Working in the formal sector certainly has advantages over 
working in the informal sector. In India workers in the "organised 
sector" get paid a good deal more (30, 40 or even 100 percent) 
than those in the "unorganised sector". 42 In China, workers in 
large-scale industry were provided until the late 1990s with the 
"iron rice bowl" of a guaranteed income plus certain housing, 
sickness and pension benefits — all things denied to people migrat- 
ing from the countryside to seek jobs. 

Employers have not, however, provided such things out of the 
goodness of their heart. They need a certain stability in their 
labour force, particularly when it comes to skilled workers who 
they do not want to be poached by rivals during times of boom. 43 
In many industries, the more stable and experienced a workforce, 
the more productive it is. Capital is prepared to concede higher 
wages to certain of the workers in those industries because by 
doing so it is able to make more profits out of them. Hence the ap- 
parent contradiction — some sections of the world's workers are 
both better paid than others, and more exploited. But by the same 
token, workers in the formal sector have the capacity to fight back 
against capital in a way which it fears. 

The growth of the informal sector rarely means the destruc- 
tion of the formal one. The informal workforce in Brazil's most 
important industrial city, Sao Paulo, grew by nearly 70 percent 
in the 1990s, but the number of "formal" workers employed in 
the private sector still remained more than four times higher 
than the number of "informal" workers. 44 It is wrong, as people 
like Paulo Singer did, to write of "deproletarianisation". 45 
Rather what is happening is a restructuring of the workforce, 
with the hiving off by big firms of some tasks (usually relatively 
unskilled and therefore easily performed by a floating work- 
force) to small firms, labour-only contractors and the 
supposedly self-employed. 

Far from the growth of the informal workforce benefiting the 
workforce in the formal sector, it has been accompanied by an in- 
creased exploitation of workers in this sector — and in many cases 
by a deterioration in wages and conditions. This has been most 
marked in Africa, where the scale of the decline in real wages for 


The Runaway System 

those with jobs in the 1980s was so great as to beggar belief. A 
report in 1991 told of: 

a sharp fall in real wages... an average 30 percent decline be- 
tween 1980 and 1986... In several countries the average rate 
has dropped 10 percent every year since 1980... On average the 
minimum wage fell 20 percent over that period. 46 

In Latin America real industrial wages fell by more than 10 per- 
cent in the 1980s, while they did so in the formal sector in India in 
the late 1990s. 47 

The use of the informal sector to batter workers in the formal 
sector has led to the widespread assumption that informal sector 
workers are powerless. But capital faces a problem here too. The 
more it relies on them, the greater their potential capacity to resist 
its demands. In India those parts of the informal sector that have 
been taking on work from the formal sector — "intermediate goods 
producing activities in the unorganised sector, eg basic chemicals, 
non-metallic mineral products, metal products, and equipment 
sectors, have witnessed rises in wages as well as productivity" — in- 
dicating that "workers' bargaining power in these segments is not 
as bad as it is made out to be". 48 

The phenomenon of casual employment is by no means new in 
the history of capitalism. Casual employment has often played an 
important role in certain industries. And forms of contract labour 
are very old — it was common in the textile factories of the indus- 
trial revolution. In the mines in both the US and Britain in the 19th 
century overseers or foremen ("buttymen") would recruit workers 
and pay them out of a sum given to them by the mine owners. Such 
casual workers may not always have felt themselves to be part of 
the working class. They were often detached from the struggles of 
other sections of that class for years, even decades, at a time. Yet 
the potential for struggling within those sections was always there, 
and when it turned into reality the struggle could be very bitter, 
with an almost insurrectionary tinge. 

Frederick Engels observed precisely this development in 1889 
when London's dockers struck for the first time. He wrote: 

Hitherto the East End had been in a state of poverty-stricken 
stagnation, its hallmark being the apathy of men whose spirit 
had been broken by hunger, and who had abandoned all hope... 

Who Can Overcome? 


And now, this gigantic strike of the most demoralised elements 
of the lot, the dock labourers, not the regular strong, experi- 
enced, relatively well-paid men in steady employment, but those 
who have happened to land up in dockland, the Jonahs who 
have suffered shipwreck in all other spheres, starvelings by 
trade, a welter of broken lives heading straight for utter ruin... 
And this dully despairing mass of humanity who, every morn- 
ing when the dock gates are opened, literally fight pitched 
battles to be first to reach the chap who signs them on, that 
mass haphazardly thrown together and changing every day, has 
successfully combined to form a band 40,000 strong, maintain 
discipline and inspire fear in the powerful dock companies... 49 

Engels' point is very important in the 21st century. Internationally 
there have been three decades of defeat and demoralisation for 
workers right across the world. This bred a fatalism about the pos- 
sibility of fighting, which was reflected in a mass of studies which 
depicted the suffering of the poor and the oppressed, showing 
them always as victims, rarely as fighters. Thus there are masses of 
materials sponsored by the International Labour Organisation on 
"social exclusion" — a theme which suits the bureaucrats who run 
such bodies. Themes like the "casualisation" and "feminisation" 
of the workforce become stereotyped, academic ways of dismiss- 
ing possibilities of struggle — even if some of those carrying 
through the studies try to escape from the paradigm in which they 
are trapped. This tendency to see the urban poor and the perma- 
nent workers as two separate groups hermetically sealed off from 
each other is particularly prevalent among NGO activists. 

The reality is more complex. Slum districts themselves are rarely 
homogenous in their social make up. Permanent workers live in 
them alongside casual workers, the poorest sectors of the self-em- 
ployed, the unemployed and even some sections of the petty 
bourgeoisie. Mike Davis tells how: 

The traditional stereotype of the Indian pavement-dweller is a 
destitute peasant, newly arrived from the countryside, who sur- 
vives by parasitic begging, but as research in Mumbai has 
revealed, almost all (97 percent) have at least one breadwinner, 
70 percent have been in the city at least six years... Indeed, 
many pavement-dwellers are simply workers — rickshaw 
men, construction labourers, and market porters — who are 


The Runaway System 

compelled by their jobs to live in the otherwise unaffordable 
heart of the metropolis. 50 

Leo Zeilig and Claire Ceruti point out that recent research on 
Soweto in South Africa shows that "in 78.3 percent of households 
there was a mix of adults who were employed, self-employed and 
unemployed". They conclude that: 

the South African township and slum might be viewed as a 
meeting point for trade unionists, university students, gradu- 
ates, the unemployed and informal traders. Though the spectre 
of unemployment affects all layers of society, these groups are 
not permanently cut off from each other and can be found in 
the same household supporting each other. 51 

The picture is similar for El Alto, the satellite city of the Bolivian 
capital, La Paz. It contains hundreds of thousands of mainly in- 
digenous Ayama people who have moved to the city from the 
countryside or closed down tin mines, and whose efforts to some- 
how make a living for themselves are characteristic of the informal 
sector in such cities everywhere in the Third World. Yet El Alto is 
also "the principal industrial zone of the La Paz region", 52 with 54 
percent of the region's industrial workforce and an increase of 80 
percent in the numbers employed in industry in the last ten years. 
What is significant is "the combination between 'informality' 
and/or small businesses based on family labour on the one hand 
and the degree of incorporation of the labour force in wage labour 
in productive tasks on the other", so that neighbourhood forms of 
organisation have a class (as well as an indigenous) content. 53 

Under these circumstances, struggles by workers have the capac- 
ity to act as a focus for all discontents of the great majority of those 
living in the slums. So in South Africa a series of protests and riots 
over the delivery of basic services created an atmosphere in which: 

the public sector general strike in June 2007 was the largest 
strike since the end of apartheid, pulling many people into 
trade union action for the first time. The potential cross-fertil- 
isation of these struggles — of community and workplace — does 
not live only in the mind of activists, but, as the survey sug- 
gests, expresses the real household economy of contemporary 
South Africa. 54 

Who Can Overcome? 


In Bolivia, El Alto was at the centre of the near uprisings that drew 
together miners, teachers, peasants and indigenous organisations 
to overthrow two governments in 18 months. In Egypt late in 
2006 a strike of 24,000 workers in the Misr Spinning factory in 
Mahalla al-Kubra: 

triggered a wave of workers' protests across Egypt, crossing dif- 
ferent sectors of the economy and industries, from Mahalla to 
Kafr al-Dawwar to Shibin al-Kum, from spinning and weaving 
to cement to the railways and underground and public transport 
workers. The strike wave went from the public sector to the pri- 
vate, to the civil service, from the old industrial areas to the new 
towns, in all provinces. It went from the textile sector to engi- 
neering, to chemicals, to building and construction, to transport 
to services. The strikes had a wide impact also, reaching sectors 
which do not have a culture of protest, such as teachers, doctors, 
and civil servants, and even to slum-dwellers such as those from 
Qala'at al-Kabsh and the villagers from Al-Atsh. 55 

Such examples show that the working class in the Third World is 
not condemned to the divisions and passivity emphasised by social 
exclusion and NGO accounts. The incessant tearing apart of old 
patterns of economic and social by capitalism as it restructures 
itself on a world scale does not simply cause suffering. It also cre- 
ates the potentiality for resistance that can find sudden expression 
when people least expect it. 

There is, in fact, a pattern of such struggles going back to the first 
impact of capitalist industrialisation in such countries, recorded, 
for instance, in the collection Peasants and Proletarians edited by 
Cohen, Gutkind and Brazier 30 years ago. 56 There are innumerable 
examples from recent decades to bear out that picture. We must 
expect many more as economic crisis interacts with climate change 
and crises of food security throughout the rest of this century. 

Fragmentation, bitterness and revolt 

But it is also important to recognise that people's bitterness against 
poverty and oppression can burst out in other ways. The fragmen- 
tation of people's life experiences in the world's slums all too often 
leads to different groups turning on each other, as Mike Davis says: 


The Runaway System 

Those engaged in informal-sector competition under conditions 
of infinite labour supply usually stop short of a total war of all 
against all; conflict, instead, is usually transmuted into ethnic, 
religious or racial violence. The godfathers and landlords of the 
informal sector (invisible in most of the literature) intelligently 
use coercion, even chronic violence to regulate competition and 
protect their investments... 

The reality of such developments cannot be denied by anyone who 
has read accounts of the interethnic and Sunni-Shia riots that peri- 
odically paralyse the Pakistan city of Karachi, of the history of 
attacks on the Chinese populations of Malaysia and Indonesia, or 
of the wave of attacks on Zimbabwean refugees in the very South 
African cities described by Leo Zeilig and Claire Ceruti. 

The city of Mumbai provides a graphic example of how the 
mood can shift. A semi-spontaneous upsurge from below by the 
workers in the city's textile mills in 1982 developed into one of the 
biggest prolonged strikes in world history, lasting a year, involving 
hundreds of thousands of workers and dominating the political 
life of India's commercial and industrial capital as it built networks 
of support going right back into the villages from which many of 
the workers had originally come. 57 During the strike there was 
unity between the different religious and caste groups that make 
up the mass of Bombay's lower classes. But the strike was defeated. 
In the aftermath Shiv Sena, a political organisation built by turn- 
ing the local Marathi speakers against other groups and then 
Hindus against Muslims, rose to a dominant position in wide 
areas of the city. This culminated in murderous riots against the 
Muslim population in 1992-3. 

Unity in struggle had created a sense of solidarity which then ex- 
erted a pull on the vast mass of the informal workers, self-employed, 
the unemployed poor and the impoverished sections of the petty 
bourgeoisie. The defeat led to the sectional attitudes and communal 
conflicts of the petty bourgeoisie influencing the self-employed, the 
unemployed and wide layers of workers. 

This was a vivid example of how there are two different direc- 
tions in which the despair and bitterness that exist among the 
"multitudes" in the great cities of the Third World can go. One di- 
rection involves workers struggling collectively and pulling millions 
of other impoverished people behind them. The other involves 
demagogues exploiting the sense of hopelessness, demoralisation 

Who Can Overcome? 


and fragmentation to direct the bitterness of one section of the 
impoverished mass against other sections. That is why the 
working class cannot simply be seen as just another grouping 
within "the multitude" or "the people", and of no intrinsic im- 
portance for the struggle against the system. Nor can workers' 
struggles be seen by those who organise them as important 
simply because of their economic content. Their struggles are 
important precisely because they have the capacity to provide a 
direction for all the bitterness among the mass of people other- 
wise without hope as they try to survive in the slums of the 
world's megacities. 

The peasantry 

The development of the capitalist form of production has cut 
the life-strings of small production in agriculture; small produc- 
tion is irretrievably going to rack and ruin... We foresee the 
inevitable doom of the small peasant... 58 

So wrote Engels in the mid- 1890s. The massive growth of the 
world's cities over the last half century has vindicated much of the 
reasoning behind Engel's statement. The peasantry is as absent 
today from North West continental Europe as it was from England 
in Engels' day. But the shrinkage globally has been much slower 
than Marx and Engels expected. Peasants still amount to about a 
third of the world's population. The reality, across much of Latin 
America, as in nearly all of Africa and South and East Asia, is that 
hundreds of millions of individual small farmers are clinging on to 
the land which they own or rent. They find themselves caught 
again and again in a vice, as rising prices for energy and fertiliser 
inputs squeeze them from one side and competition from capitalist 
farms with modern equipment presses them on the other. And the 
discontent bred by this can still make the peasantry an important 
political fact in major countries in the Global South. Even in Latin 
America, where the peasantry shrank by half between the 1960s 
and the 1980s, 59 it has been peasant-based rebellions against capi- 
talism that have caught the imaginations of people around the 
world, with the Zapatistas in southern Mexico, the MST landless 
workers' movement in Brazil and a big section of the movement 
which swept Evo Morales to the presidency of Bolivia in 2006. 


The Runaway System 

These movements have led many activists to adopt what are 
sometimes called "neo-populist" views. 60 These see the peasants 
as the agent of social change, or at least a component in the 
agency of the "multitude". And sometimes the future of world 
food production is also seen as lying with them, since food pro- 
duction per hectare is often greater on small peasant plots than on 
larger holdings. 61 

But missing from this recognition of the persistence of the peas- 
antry as a force, even if a declining one, is the way in which it has 
been changed profoundly by capitalism, although not necessarily 
in the way which Marx and Engels expected. Hamza Alavi and 
Teodor Shanin pointed out in the late 1980s that "two alternative 
forms of agricultural production" had developed within capital- 
ism — on the one hand "farming based on wage labour", and on 
the other "a form of organisation of production based on the 
family farm which is incorporated into the capitalist mode of pro- 
duction". In this second form, "The peasant economy is 
structurally integrated within the capitalist mode of production" 
and "surplus value is extracted from the peasant through the 
agency of commercial capital and credit institutions" and "con- 
tributes to capital accumulation — but outside the peasant 
economy from which it is drawn". 62 

The peasantry that has been drawn into the circuits of capital- 
ism in this way is not a homogenous group, but differentiated 
internally on the basis of size of landholding, ownership of equip- 
ment and levels of debt. At one extreme are those who have 
managed, by one means or another, to transform themselves into 
petty agricultural capitalists, at the other the landless labourers. 
Between them lies a bigger or smaller layer of those who rely on 
family labour, perhaps employing wage labour occasionally, per- 
haps supplementing their household incomes by agricultural 
labour for others. 

Labour outside agriculture can be important for the poor and 
middle peasants. Figures from 15 developing countries in the 
1980s showed non-agricultural income amounted 30 to 40 per- 
cent of total rural household income; in China it increased from 
10 percent in 1980 to 35 percent in 1995 63 and "acquiring non- 
agricultural jobs has become crucial to avoiding the fate of 
peasant life and escaping rural poverty"; 64 in Egypt 25 percent of 
rural household income came from "wages outside the village" 
in the 1980s. 65 

Who Can Overcome? 


Not all peasant households are integrated into the wider econ- 
omy in the same way. For many there are only the most menial 
forms of wage labour. But a minority may establish links with 
those in privileged positions — delivering support for politicians, 
doing favours for big landowners or moneylenders, manipulating 
supposedly traditional family, clan or tribal networks. A differen- 
tiation arises between peasant households as struggles over land 
are tied into the conflicts in the wider economy, at a local, a na- 
tional or even a global level. 66 

Such differentiation means that what are conventionally de- 
scribed as "peasant movements" do not have a single automatic 
trajectory of opposition to capitalism and the ruling classes. The 
leadership in peasant movements often comes from those who 
have been most successful in enlarging their holdings and accu- 
mulating enough capital to employ labour power rather than 
sell it. They have sufficient freedom from daily toil and suffi- 
cient connections to wider society to take the initiative when it 
comes to mobilising others. Hamza Alavi noted long ago that 
peasant revolts tend to be led by middle peasants, not poor 
peasants or landless labourers. 67 The penetration by capitalism 
of the countryside means that it can, in fact, be the petty agri- 
cultural capitalists who head peasant movements, putting 
forward demands like lower prices for fertilisers that benefit 
themselves disproportionately. 

That is not the only direction in which revolts from the coun- 
tryside can go. The differentiation of the peasantry often means 
that the middle and poor peasants are under pressure from those 
who will use political connections to drive them from the land — 
caste Hindu landowners in India, local party cadres in China, 
chiefs connected to state apparatuses in Africa, soya barons in 
Brazil. The result can be uprisings directed against the petty agrar- 
ian capitalists and not led by them. But such uprisings then have 
to confront the forces of the state, which try to isolate them in par- 
ticular localities, relying upon the very way in which the peasant 
household gets a livelihood — by labouring to produce a harvest 
from its own plot of land — to disperse the protests. So the 
Zapatista insurgency rocked the Mexican state, but that did not 
prevent the state effectively sealing the movement off in the 
Lacandon jungle where it remains isolated a decade and half later. 
The various Maoist movements of dalits (the former "untouch- 
ables"), tribal peoples, the landless labourers and poor peasants in 


The Runaway System 

India are annoying to Indian capitalism, but so long as they are re- 
stricted to remote country areas no more annoying than a gnat bite 
is to a healthy adult. 

Yet the very penetration of the countryside by capitalism makes 
it more possible than ever before for links between the poorer sec- 
tions of the peasantry and the urban workers. For it means that the 
poor peasant households have, through migration, family members 
in the cities. Just as workers' struggles can provide a focus for the 
bitterness felt by all the groups who live in the slums of the cities, so 
too they can do so for the hundreds of millions who still toil on 
remote patches of land. But whether that possibility becomes an ac- 
tuality depends on workers fighting to win with demands that 
reach out to the poorer layers in the towns and countryside alike. 

Who can overcome? 

It is the very development of capitalism that shapes and reshapes 
the lives of those it exploits, creating the objective circumstances 
that can turn a disparate mass of people who sell their labour 
power into an increasingly self-conscious class "for itself". This 
class is the potential agent for challenging the chaotic and destruc- 
tive dynamic of capitalism because capitalism cannot do without 
it. The mistake of Mouffe and Laclau — and thousands of other so- 
ciologists, philosophers and economists who write that the 
working class has lost its central place within the system — is that 
they do not grasp the elementary point made by Marx. The system 
is a system of alienated labour that has taken on a life of its own, 
and capital cannot survive without more labour to feed it, just as 
the vampire cannot survive without fresh supplies of blood. 

There have been phases in the history of the system when it has 
had the means to bind the mass of people to it, either by repression 
or by keeping them relatively content. Hitler on the one hand and 
Stalin on the other did seem to rule on the basis of mass repression 
during what the Belgian-Russian revolutionary Victor Serge called 
the "midnight in the century". 68 It was possible for a British prime 
minister, Harold Macmillan, to tell people they had "never had it 
so good", and for most workers to concur, even if grudgingly, 
during the 1950s. I have tried to show that the dynamic of the 
system is going to make it difficult for capitalism to cement its con- 
trol permanently over the mass of people by either means. 

Who Can Overcome? 


Its very restlessness means that it cannot allow those it exploits 
to remain in any degree of contentment for any great length of 
time. As the runaway system lurches from boom to slump and tries 
to boost profits and write off debts in a wild attempt to lurch back 
again it dashes the very hopes of a secure life that it has encour- 
aged in the past. It insists the mass of the people have to work 
longer for less, to accept they must lose their jobs because bankers 
lost their heads, to resign themselves to hardship in old age, to give 
up their homes to the repo men, to go hungry on peasant plots so 
as to pay the moneylender and the fertiliser supplier. 

People will react against this. Some were already doing so as I 
wrote these words. The last spurt of the mid-1990s onwards fi- 
nance-fuelled boom saw spontaneous riots against rising food and 
energy prices in a score of countries. The first months of its new 
recession saw protests, riots and strikes against its effects. It could 
not be otherwise. All such movements can provide people with the 
conditions for learning for themselves about the potentialities of 
class struggle against the system. And the interaction of recurrent 
crises — economic, military, ecological — is repeatedly going to 
create conditions that breed further discontent even if capitalism 
does somehow finally emerge from the present crisis intact. 

It bears repeating again and again that the wealthiest society in 
human history, the United States, operated over the last three 
decades before the current crisis broke by pushing down the living 
standards of those who labour within it. That too was the pattern 
of Japan from the early 1990s on. They are examples which those 
who rule over Western Europe have set out to emulate, and any 
success they have will create similar pressures on those presiding 
over capital accumulation in the newly industrialising societies of 
East and South East Asia. That does not necessarily mean there 
might not be spells in which some parts of the system might seem 
better than in the recent past to many who live within them. Such 
was the case in the mid to late 1980s and the mid to late 1990s, 
and it may well happen again. But in the "runaway world" of cap- 
italism in the 21st century they cannot last long, and the crises that 
bring their sudden end can raise discontent to massive levels. 

Lenin laid out conditions that he saw as necessary for society 
to enter a "pre-revolutionary crisis". Two are going to be ful- 
filled again and again in this century. The ruling class will not be 
able continue with things in the old way. And the mass of people 
will not feel able to put up with things in the old way. These two 


The Runaway System 

elements have produced very important social upheavals in the 
decades since the demise of the long boom — from Iran in 1979 
and Poland in 1980-81, through to Russia in 1989-91, to 
Indonesia in 1998, to Argentina and then Venezuela and Bolivia 
in the years after 2001. The escalation of crisis in October 2008 
led President Sarkozy of France to warn fellow rulers of the 
danger of "a European 1968". Whether his warning was right or 
wrong in the short term, we will see massive social upheaval re- 
peatedly in the decades ahead. But what has so far been lacking 
has been a third element Lenin focused on, the subjective one: a 
political current able to win people in their masses to the notion 
of a reorganisation of society and prepared to take decisive 
action at key moments in leading people to fight for it. 

The absence of such a current is itself a product of objective 
processes, some of which are described in this book. The last 
great wave of insurgency against the system in the late 1960s and 
early 1970s failed to break through. 69 Restructuring of the system 
through crises disorganised many of the forces involved in that in- 
surgency just as defeat demoralised the left. The demoralisation 
was made more profound by the way the great majority of those 
on the left worldwide identified with the societies of the old 
Eastern bloc, societies which had, in fact, been absorbed into the 
system's dynamic of competitive accumulation and which suf- 
fered more than most from the crisis of the state capitalist phase 
of the system. 

It was as if much of the left had to be born afresh when the 
latest phase of insurgency began to take off with the Chiapas re- 
bellion in Mexico and a wave of public sector strikes in France in 
1995, the demonstrations against capitalist globalisation of 1999- 
2001 and the movement against the Iraq war in 2002-3. But being 
born afresh also meant having to learn afresh. Typically, activists 
talked about fighting globalisation or neoliberalism, not capital- 
ism. But the runaway system has itself created the objective 
conditions for yet another shift. 

As I write this, the sheer scale of the crisis facing the world 
system is forcing even those who run the system to talk about cap- 
italism, and having to recognise that Marx had something to say 
about it long before Keynes. Many of the new generation of ac- 
tivists have begun to study his writings and many of the older 
generation suddenly find they have an audience to pass what they 
have learnt on to. 

Who Can Overcome? 


That in itself does not guarantee that the subjective element will 
arise to make sure that the next great revolts against the system are 
not contained by it. For that to happen, those who study capital- 
ism have to become an integral part of a movement of those who 
suffer from it. What we can say with certainty is that without such 
a movement the world by the end of this century is going to be in- 
tolerable for the majority of those who live in it. As the young 
Marx put it, "Philosophers have interpreted the world in many 
ways. The point is to change it." 


The Runaway System 



1 For a summary of the various attempts to measure happiness, see Iain 
Ferguson, "Capitalism and Happiness", International Socialism, 2:117, 2008. 

2 Washington Times, 24 October 2008. 

3 Bank of International Settlements, Annual Report, June 2007. 

4 Quoted in Randall E Parker, Introduction, Economics of the Great 
Depression (Edward Elgar, 2007), px. 

5 Quoted in as above, p95. 

6 Interviewed in Randall E Parker, Economics of the Great Depression, p95. 

7 Alfred Marshall, The Principles of Economics, 8th edition (London, 1936), 

8 Joan Robinson, Further Contributions to Economics (Oxford, 1980), p2. 

9 See, for instance, Gillian Tett, "Curse of the Zombies Rises in Europe Amid 
an Eerie Calm", Financial Times, 3 April 2009. 

10 Karl Marx, Economic and Philosophical Manuscripts of 1 844, 

11 Karl Marx and Frederick Engels, Collected Works, Volume 34 (London, 
Lawrence and Wishart, 1991), p398. 

12 Karl Marx and Frederick Engels, Manifesto of the Communist Party, available 

13 Put together by Engels from manuscripts Marx left in an incomplete state. 

14 Also edited by Engels after Marx's death. 

15 Available today as the Grundrisse, Theories of Surplus Value, and Marx's 
Notebooks for 1861-3. 

16 This is the basis of the so-called "transformation problem". 

17 Willem Buiter, Financial Times, 17 September 2008. 

1 8 Arun Kumar provides a very useful account of how the conventional figures 
provide a distorted view of India, in "Flawed Macro Statistics", in 
Alternative Economic Survey, India 2005-2006 (Delhi, Daanish, 2006). 

Chapter One: Marx's Concepts 

1 Usually called "horticultural societies" by anthropologists. 

2 Adam Smith, The Wealth of Nations, Book One, Chapter 4, available at; see also David Ricardo, On 
the Principles of Political Economy and Taxation (Cambridge, 1995), pll. 

3 Karl Marx, Capital, Volume One (Moscow, Progress Publishers, 1961), 

4 It has, however, been partially recognised by some dissident mainstream 
economists belonging to the so-called Austrian school. So the conservative 
enthusiast for the "free market" Friedrich August von Hayek put consider- 


able emphasis on the physical distinctiveness of commodities which cost the 
same price in his account of the business cycle. See, for example, his Prices 
and Production (London, 1935). 

5 Followers of Piero Sraffa (1898-1983), an Italian economist at Cambridge 
University who did not see his own system as departing from Marx's, though 
people like Ian Steedman have used hiswritings in this sense. 

6 This was the conclusion arrived at by "Analytical Marxists" like G A Cohen 
and Eric Olin Wright. See, for instance, G A Cohen, "The Labour Theory of 
Value and the Concept of Exploitation", in Ian Steedman and others, The 
Value Controversy (London, Verso, 1981), pp202-223. 

7 Adam Smith, The Wealth of Nations, Book One, Chapter 5, available at 

8 Marx, Capital, Volume One, p39. 

9 As above. 

10 Some translations into English use the archaic word "aliquot" for propor- 
tionate, adding considerably to the difficulty of Marx's work for new readers. 

11 Karl Marx, "Letter to Kugelman" (11 July 1868), in Karl Marx and 
Frederick Engels, Collected Works, Volume 43 (New York, 1987). 

12 Marx, Capital, Volume One, p75. 

13 The use of the word "embodied" sometimes causes confusion. For clarifica- 
tion, see Guglielmo Carchedi, Frontiers of Political Economy (London, 
Verso, 1991), pplOO-101. 

14 See also 1 1 Rubin, Essays on Marx's Theory of Value (Montreal, Black Rose, 
1990), p71. 

15 This is not always immediately obvious from Marx's exposition in Chapter 
One of Capital. This involves him analysing the commodity in abstraction 
from other features of the capitalist system which he deals with later. 
Competition is taken for granted, since commodity production assumes the 
competitive sale of commodities, but there is no account at this stage of its 
further impact. In the same way, Chapter One does not deal with capital 
although Marx later insists that it is only in a capitalist society that "being a 
commodity is the dominant and determining characteristic of its products" 
(Capital, Volume Three, Moscow, Progress Publishers, 1974, p857). For a 
fully rounded exposition of how competition between capitals subordinates 
each of them to the law of value, see Capital, Volume Three, p858; and 
Marx's posthumously published manuscript, "Results of the Direct 
Production Process", Karl Marx and Frederick Engels, Collected Works, 
Volume 34, pp355-466, available at 
works/1 8 64/economic/index.htm 

16 Marx, Capital, Volume One. 

17 As above, p72. 

18 As above, p74. 

19 Figures for biggest 2,000 companies from "The Big Picture",, 4 September 2008. 

20 Adam Smith, The Wealth of Nations, Book One, Chapter 8. 

21 As above. 

22 It was one of the points with which Marx disagreed with Ferdinand Lassalle, 
and it also caused him to write a pamphlet directed to an English working 
class audience, Wages, Price and Profit. 

23 Karl Marx, Wage Labour and Capital. A slightly different translation to that 
used here is to be found at 



24 Karl Marx, Grundrisse (London, Penguin, 1973). Also available at 

25 Marx, Capital, Volume One, p409. 

26 So the chapters in Capital on manufacturing and machinery fall within the 
section of the work entitled "The Production of Relative Surplus Value", 
Capital, Volume One, pp336-504. 

27 Marx, Capital, Volume One, p411. There is a minor ambiguity in Marx's 
work as to whether the intensification of the labour without any changing of 
technique amounts to "relative" or "absolute surplus value", since a passage 
on page 410 seems to imply the latter, and this is how some people read Marx. 
The point has no wide significance. I prefer the "relative surplus value" option 
since it is invariably combined with the introduction of machinery which, as 
Marx points out repeatedly, usually increases rather than diminishes the 
burden on the worker — and produces a different sort of resistance to that 
produced by extending the working day. 

28 Marx, Capital, Volume One, p410. 

29 As above, p411. 

30 Engels, "Socialism: Scientific and Utopian," in Marx, Engels and Lenin, The 
Essential Left (London, Unwin Books, 1960), pi 30. There is sometimes 
confusion among Marxists about this. Some contend competition cannot be 
constitutive of capital since Marx's method in Volume One of Capital is to 
arrive at the general laws of the system by abstracting from the impact of 
competition over the distribution of surplus value between the different units 
of the system. Competition then supposedly belongs to the sphere of distribu- 
tion, not that of production. But the competition is between producing units. 
It arises from the fact that their interaction with each other is not planned. 
This then imposes on each the general features of the system Marx analyses 
in Volume One. Without it there would be no reason for the individual 
capitals to abide by the law of value, even if some of the necessary effects of 
competition express themselves in the sphere of distribution. As Marx puts it, 
"The inner law [of value] enforces itself only through their competition, their 
mutual pressure upon one another." Hence it is absurd for some theorists to 
claim that the notion of capital does not include the notion of many compet- 
ing capitals; the concept of capital presupposes commodity production. It is 
similar to substituting input-output tables relating particular industries to 
each other for the competition between capitals and then claiming to have a 
model of capitalist society, as do the "Ricardian" critics of Marx's theories. 

31 Marx, Capital, Volume One. 

32 "Valorisation" is the French translation of the German term used by Marx, 
Verwertung. "Valorisation" in French means an expansion in the value of 
something (eg a company share). But the general English meaning of the 
word is different, meaning simply "fixing the price or value of a commodity, 
etc, especially by a centralised organised scheme" (Shorter Oxford English 
Dictionary, Third Edition). This usage leads to confusion with the very differ- 
ent concept of "realisation" (ie getting the monetary value of commodities), 
which is how the term valorization is used in the English translation of the 
Grundrisse by Martin Nicolaus. All this is confusing for newcomers to 
Marx's writings — and encourages an academicist tendency to dense, often 
nearly unintelligible, expositions of Marx's analyses. 

33 Marx, Capital, Volume One, p751. 

34 As above, p716. 

35 This is something David Harvey slips into in his books The New Imperialism 
(Oxford, 2005) and A Short History of Neoliberalism (Oxford, 2007). 



Chapter Two: Marx and His Critics 

1 Leon Walras, Elements of Pure Economics (London, George Allen, 1954 
[1889]), P 242. 

2 As above, p372. 

3 Alfred Marshall, The Principles of Economics, 8th edition (London, 1936) 

4 "Interview with Kenneth J Arrow", in G R Feiwel (ed) Joan Robinson and 
Modern Economic Theory (London, Macmillan, 1989), ppl47-148. 

5 Meaning "desirability". 

6 Irving Fischer, "Is 'Utility' the Most Suitable Term for the Concept it is Used 
to Denote?" American Economic Review, Volume 8 (1918), pp335-7. 

7 For a series of articles discussing this problem and the failure of different 
marginalist economists to deal with it, see J Eatwell, M Milgate and P 
Newman (eds), Capital Theory (London, Palgrave, 1990). The article by L L 
Pasinetti and R Scazzieri, "Capital Theory: Paradoxes", ppl36-147, provides 
a useful and relatively accessible summary of the arguments. See also Joan 
Robinson, Economic Philosophy (London, Watts, 1962), p60. 

8 Joan Robinson, EconomicPhilosophy, p68. 

9 A Marshall, The Principles of Economics, p62. 

10 "Two sets of incommensurable collections of miscellaneous objects cannot in 
themselves provide the material for a quantitative analysis", John Maynard 
Keynes, General Theory of Employment, Interest and Money (London, 
Macmillan, 1960), p39. 

11 J M Keynes, General Theory of Employment, Interest and Money, p39. 

12 Although it is a version in which the wage is the measure of value, rather 
than Ricardo's version, where it is labour performed. 

13 J M Keynes, General Theory of Employment, Interest and Money, p41. 

14 As above, pp2 13-2 14. 

15 Marx, Capital, Volume One, p858. 

16 A rise in the price of basic consumer goods will cause workers to pay more, so 
raising the price capitalists have to pay for their labour power in the form of 
wages. Of course, in reality, none of this happens without struggles between 
different capitalists and between capitalists and workers. 

17 This whole argument for Marx's position is put simply and at length in Andrew 
Kliman, Reclaiming Marx's Capital (Lexington Books, 2007) ppl49-175. 

18 See Ian Steedman, Marx after Sraffa (London, New Left Books, 1977); for 
an influential debate on the issue see Ian Steedman and others, The Value 
Controversy (London, Verso, 1981). See in the same collection, Geoff 
Hodgson, "Critique of Wright: Labour and Profits", pp75-99. For the 
mainstream account of Marx, see P A Samuelson, "Understanding the 
Marxian Notion of Exploitation: A Summary of the So-Called 
Transformation Problem between Marxian Values and Competitive Prices", 
Journal of Economic Literature, 9:2 (1971), pp399-431. 

19 Ben Fine, "Debating the 'New' Imperialism", Historical Materialism, 14:4 
(2006), pl35. 

20 As above, pl54. 

21 For a fuller and very influential account of this critique, with mathematical 
presentations, see Paul Sweezy, The Theory of Capitalist Development 
(London, Dennis Dobson, 1946), ppl 15-123; see also G Carchedi, Frontiers 
of Political Economy, (London, Verso, 1991) pp90-92; A Kliman, 
Reclaiming Marx's Capital, pp45-46. 



22 P Sweezy, The Theory of Capitalist Development, ppl 15 and 128. 

23 Miguel Angel Garcia, "Karl Marx and the Formation of the Average Rate of 
Profit", International Socialism, 2:5 (1979); Anwar Shaikh, "Marx's Theory 
of Value and the 'Transformation Problem'", in Jesse Schwartz (ed), The 
Subtle Anatomy of Capitalism (Santa Monica, Goodyear, 1977). 

24 This is an argument I accepted and spelt out in my book Explaining the 
Crisis (London, Bookmarks, 1984), ppl60-162. 

25 They have formulated what are known as "temporal" interpretations of Marx. 

26 For various presentations of this argument, using mathematical examples, see 
G Carchedi, Frontiers of Political Economy, pp92-96; A Kliman, Reclaiming 
Marx's Capital, ppl51-152; Alan Freeman, "Marx without Equilibrium", 
MPRA Paper no. 1207 (2007) available at .de/1 2 07/1 MPRA_paper_1207.pdf 

27 This interpretation of Marx on this point is known as the "single system 
interpretation". Some of those who hold to it also accept, like me, the temporal 
interpretation, with the combination of both being known by the cumbersome 
(and somewhat offputting) phrase "The Temporal Single System 
Interpretation" or TSSI. 

28 G Carchedi, Frontiers of Political Economy, pp96-97. 

29 Marx, Capital, Volume One, p44. 

30 This is essentially the account provided by Bob Rowthorn in Capitalism, 
Conflict and Inflation (London, Lawrence and Wishart, 1980) pp231-249. 
Except that Rowthorn sees training as taking place mainly via the state and 
therefore, for him, outside of capitalism. Carchedi sees training as adding to 
the value of labour power, but does not explain how this transfers into the 
final product (Carchedi, Frontiers of Political Economy, ppl30-133). 
Alfredo Saad Filho and P Harvey both strongly reject the interpretation I 
have put here because "it conflates education and training with the storing of 
up of labour in machinery and other elements of constant capital" — see 
Alfredo Saad Filho, The Value of Marx (London, Routledge, 2002), p58. For 
Harvey, "Skilled labour creates more value in equal periods of time than 
does unskilled labour because it is physically more productive, and there is 
no reason to suppose that any determinate relationship exists between this 
increased physical productiveness and the physical productivity of the extra 
labour needed to produce the skill" — P Harvey, "The Value Creating 
Capacity of Skilled Labor in Marxian Economics", Review of Radical 
Political Economy, 17:1-2, quoted by A Saad Filho, in The Value of Marx). 
But what Harvey is assuming is that there is some way of measuring the 
comparative physical productivities of labour that might be producing quite 
different products, ie that you can equate the value of commodities by com- 
paring their use values. This leaves him (and A Saad Filho) open to the very 
objection made by Bohm-Bawerk. 

31 G Carchedi, Frontiers of Political Economy, pi 33. 

Chapter Three: The Dynamics of the System 

1 John Stuart Mill, Principles of Political Economy (London, 1911), p339. 

2 See L Walras, Elements of Pure Economics, p381. For Jevons, see Eric Roll, 
A History of Economic Thought (London, Faber, 1962), p376. 

3 Anwar Shaikh, "An Introduction to the History of Crisis Theory", in Bruce 
Steinberg and others (eds), US Capitalism in Crisis (New York, Union of 
Radical Political Economics, 1978), p221. Also available at http: //homepage 

4 Luca Pensieroso, "Real Business Cycle Models of the Great Depression; A 



Critical Survey", Discussion Papers 2005005, Universite Catholique de 
Louvain, 2005, pp3-4, available at 
2005-5.pdf; see also Randall E Parker, Economics of the Great Depression, 
P 29. 

5 Marx, Capital, Volume One, pp 1 1 0- 1 1 1 . 

6 As above, pill. 

7 This, for instance, is the argument of Pavel V Maksakovsky, in The 
Capitalist Cycle (Leiden, Brill, 2004). 

8 Marx, Capital, Volume Three, pp239-240. 

9 The most prevalent recent version has probably been that expounded by the 
radical American economists Paul Baran and Paul Sweezy in their book 
Monopoly Capital (London, Penguin, 1968). They see capitalism's problem as 
lying in a growing "surplus" which cuts the buying power of the masses and 
produces a secular trend to stagnation. A somewhat similar position is ex- 
pounded by Joseph Steindl, Maturity and Stagnation in American Capitalism 
(New York, Monthly Review, 1976). See my critique of these positions in my 
book, Explaining the Crisis, ppl48-154. See also Michael Bleaney, 
Underconsumption Theories (London, Lawrence and Wishart, 1976); Anwar 
Shaikh, "An Introduction to the History of Crisis Theory", in Bruce Steinberg 
and others (eds), US Capitalism in Crisis pp229-231. 

10 The rest of this section is a paraphrase of the argument in Pavel V 
Maksakovsky, The Capitalist Cycle. 

1 1 Interpretations of Marx's analysis which saw things simply in terms of dispro- 
portionality were prevalent among reformist socialists in the first decades of the 
20th century. See Paul Sweezy, The Theory of Capitalist Development, pl56. 

12 This paragraph is a very condensed summary of the first four chapters of 
Volume Two of Marx's Capital (Moscow, Progress Publishers, 1984). 

13 Marx, Capital, Volume Two, pi 00. 

14 Marx, Capital, Volume Three, p432. 

15 As above, p495. 

16 See, for example, "In Praise of Hyman Minsky", Guardian, 22 August 2007. 

17 Named after an Italian American fraudster of the early 1920s. There is an 
early account of such a scheme in Charles Dickens's Martin Chuzzlewit, 
written in 1844-5. 

18 Marx, Capital, Volume Three, p383. 

19 As above, p384. 

20 As above, p249. 

21 FA Hayek, Prices and Production (London, George Routledge, 1935), 

22 See the quotes from Nigel Lawson in William Keegan, Mr Maudling's 
Gamble (London, Hodder & Stoughton, 1989), p55. 

23 Leon Trotsky, "Report on the World Economic Crisis and the New Tasks of 
the Communist International", The First Five Years of the Communist 
International, Volume One (New York, Pathfinder, 1972). 

24 W Keegan, The Spectre of Capitalism (London, Radius, 1992), p79. On the 
socialist left the Marxist account was rejected in the 1970s by Andrew Glyn, 
Bob Sutcliffe, John Harrison, Paul Sweezy and others. For a full account of 
the views of these "Marxist" critics of Marx's, see my book Explaining the 
Crisis, pp20-30. 

25 For instance, those who accept the theories of monopoly associated with 
Baran and Sweezy; the Sraffian, neo-Ricardian current of Harrison, Steedman, 
Hodgson, Glyn and others; also critics of the Sraffians such as Bob Rowthorn. 



26 Marx, Capital, Volume Three, pp236-7. 

27 As above, p237. 

28 As above, p245. 

29 See, for instance, John Stuart Mill, Principles of Political Economy, Book 4, 
Chapters 4 and 5, available at 

30 Eric Hobsbawm, Industry and Empire (London, Penguin, 1971), p75. 

31 Marx's rejection of Ricardo's explanation makes nonsense of Robert 
Brenner's assertion that Marx's theory rests on a "Malthusian" assumption 
that "productivity can be expected to fall". See Robert Brenner, "The 
Economics of Global Turbulence", New Left Review, 1:229 (1998), pll. 

32 Marx, Capital, Volume One, p612. 

33 Marx also uses another concept, the "value composition of capital" to describe 
the ratio of investment in means and material of production to the cost of 
labour power (or, in his terminology, the ratio of constant capital to variable 
capital, or c/v). Marx then defines the organic composition of capital as the 
value composition "in so far as it determined by the technical composition". 
Fred Moseley argues this distinguishes changes in the organic composition 
from changes in the value composition due to alterations in the cost of either 
means of production or labour power. See Fred Moseley, The Falling Rate of 
Profit in the Postwar US Economy (London, Macmillan, 1991), pp3-6. See 
also the discussion at 

02 11/0092. html. By contrast, Ben Fine and Lawrence Harris in Rereading 
Capital (London, Macmillan, 1979, pp58-60) argue that the "value compo- 
sition of capital is the ratio of the current value of the means and material of 
production consumed to the current value of labour power consumed". The 
point is that the current value of the capital consumed is not necessarily the 
same as the value of the original investment — indeed this is a point we will 
deal with later, and the value of consumed capital will tend to be less than 
the value of invested capital, as increased productivity reduces the socially 
necessary labour needed to produce each unit of capital. 

34 I Steedman, Marx After Sraffa, p64; compare also ppl28-29. 

35 Andrew Glyn, "Capitalist Crisis and the Organic Composition", Bulletin of 
the Conference of Socialist Economists, 4 (1972); Andrew Glyn 
"Productivity, Organic Composition and the Falling Rate of Profit: A 
Reply", Bulletin of the Conference of Socialist Economists, 6 (1973). 

36 Susan Himmelweit, "The Continuing Saga of the Falling Rate of Profit: A 
Reply to Mario Cogoy", Bulletin of the Conference of Socialist Economists, 
9 (1974). 

37 Robert Brenner, The Economics of Global Turbulence (London, Verso, 2006), 
footnote, ppl4-15. 

38 Gerard Dumenil and Dominique Levy, The Economics of the Profit Rate 
(London, Edward Elgar, 1993). 

39 Nobuo Okishio, "Technical Changes and the Rate of Profit", Kobe University 
Economic Review, 7 (1961), pp85-99. 

40 For Marx's argument with a numerical example, see Capital, Volume One, 

41 For more on this argument, with a simple numerical example of my own, see 
my book Explaining the Crisis, pp29-30. 

42 For a general mathematical proof of this argument, see, for instance, N 
Okishio, "A Formal Proof of Marx's Two Theorems", Kobe University 
Economic Review, 18 (1972), ppl-6. 



43 See, for example, the arguments of Hodgson, Steedman, Himmelweit, Glyn, 
Brenner, and Dumenil and Levy. 

44 This point was made by Robin Murray in a reply to an attempt by Glyn to 
use a "corn model" to disprove the falling rate of profit (see Robin Murray, 
"Productivity, the Organic Composition and the Rate of Profit", Bulletin of 
the Conference of Socialist Economists, 6, 1973). It has since been amplified 
by the temporal single-system school of Marxist economists. 

45 Robert Brenner, after rejecting Marx's theory of the tendency for the rate of 
profit to fall on the basis of Okishio's argument, then puts forward an account 
of his own which rests precisely on the way in which capitalists who have 
invested a lot in fixed capital in the past see their prices undercut and their 
profits threatened by capitalists who have invested more recently with 
cheaper or technologically more advanced fixed capital. Having accepted 
Okishio's position on one page, Brenner provides his own refutation of 
Okishio a few pages later — and does not realise he has done so. See Robert 
Brenner, Economics of Global Turbulence, ppl4-15 and 28-31. 

46 Marx, Capital, Volume Three, p231. 

47 Exceptional cases will be when completely new lines of production emerge 
with low organic compositions of capital but with a level of production and 
investment capable of absorbing a lot of accumulated surplus value. But 
these exceptions will soon be gripped by the tendency for their organic 
compositions to rise. 

48 Marx, Capital, Volume Three, p241. 

49 Marx's argument is contained in Volume Three of Capital, pp239-240 and 
p252. Ever since Marx's time there have been debates between various 
schools of Marxists who see the crisis as originating in the rate of profit or in 
the disproportion between different sectors of production and the rate of 
profit. In these passages Marx sees the tendency of the rate of profit to fall 
as clashing with the pursuit of the capital's selfexpansion, so producing 
disproportionalities and a periodic lag of effective demand behind global 
output. Confusion arises because Marx did not finish Volume Three of 
Capital, leaving behind a sometimes fragmentary manuscript which Engels 
tried to put into some order. It is then all too easy for people to quote from 
one page without relating it to what appears on other pages. 

50 Rudolf Hilferding, Finance Capital (London, Routledge, 1981), pp93 and 257. 

51 Otto Bauer was responding to an argument about the breakdown of capital 
from Rosa Luxemburg (discussed further on) which was very different to 
that of Henryk Grossman. 

52 Henryk Grossman, The Law of Accumulation and the Breakdown of the 
Capitalist System, (London, Pluto, 1992), p76. See also Rick Kuhn, Henryk 
Grossman and the Recovery of Marxism (Champaign, IL: University of 
Illinois Press, 2006), pp224-234. Grossman based his argument, in part, on 
a passage in Volume Three of Capital (p247), where Marx writes that, "a 
portion of the capital would lie completely or partially idle (because it would 
have to crowd out some of the active capital before it could expand its own 
value), and the other portion would produce values at a lower rate of profit, 
owing to the pressure of unemployed or but partly employed capital... The 
fall in the rate of profit would then be accompanied by an absolute decrease 
in the mass of profit, since the mass of employed labour power could not be 
increased and the rate of surplus value raised under the conditions we had 
assumed, so that the mass of surplus value could not be increased either." 

53 Henryk Grossman, The Law of Accumulation and the Breakdown of the 



Capitalist System, (London, Pluto, 1992) pi 91. 

54 See Rick Kuhn, Henryk Grossman and the Recovery of Marxism, ppl 38-148. 

55 Henryk Grossman, The Law of Accumulation and the Breakdown of the 
Capitalist System, (London, Pluto, 1992) p76. Also Rick Kuhn, Henryk 
Grossman and the Recovery of Marxism, p85. 

56 See, for instance, Marx, Capital, Volume Three, p241. 

57 Marx, Capital, Volume One, p360. 

58 As above, p356. 

59 As above. 

60 For a very good presentation of this argument, see "Marx's Theory of Value", 
in Michael Kidron, Capitalism and Theory (London, Pluto, 1974), pp74-75. 

61 K Marx and F Engels, The German Ideology, in Marx and Engels, Collected 
Works, Volume 5, p52. 

62 See John Bellamy Foster, Marx's Ecology (New York, Monthly Review, 
2000); Paul Burkett, Marx and Nature: A Red and Green Perspective 
(London, Palgrave, 1999). 

63 Marx, Capital, Volume One, pi 77. 

64 Marx, Capital, Volume Three, p792. 

65 As above, p793. 

66 Marx, Capital, Volume One, pp506-508. 

67 Marx, Capital, Volume Three, p793. 

68 F Engels, The Dialectics of Nature, in Marx and Engels, Collected Works, 
Volume 25, p461. 

69 As above, p462. 

70 As above, p463. 

71 Marx, Capital, Volume One, p233. 

72 Marx and Engels, Communist Manifesto, available at 
archive/marx/works/1 848/communistmanifesto/chOl .htm 

73 There were a few exceptions in the 20th century, most notably Joseph 
Schumpeter in his Capitalism, Socialism and Democracy (London, Allen & 
Unwin, 1943), but they nearly always owed a debt to Marx for their approach, 
even while trying to adjust his findings to justify capitalism rather than damn it. 

74 For this reason, Marx does not only describe the law of value as functioning 
in an abstract model of commodity production in Chapter One of Volume 
One of Capital, but also as it functions at a more concrete level through the 
interplay of capitals in the chapter "Distribution Relations and Production 
Relations" in Volume Three of Capital (pp857-859). 

Chapter Four: Beyond Marx: Monopoly, War and the State 

1 Quoted in D M Gordon, "Up and Down the Long Roller Coaster", in Bruce 
Steinberg and others (eds), US Capitalism in Crisis, p23. 

2 See "Figure 2: Net Returns on Capital in the UK, 1855-1914", in A J Arnold 
and Sean McCartney, "National Income Accounting and Sectoral Rates of 
Return on UK Risk-Bearing Capital, 1855-1914", November 2003, available 

3 See the accounts in Gareth Stedman Jones, Outcast London 
(Harmondsworth, Penguin, 1991). 

4 Frederick Engels, "Preface to the English Edition" (1886) in Marx, Capital, 
Volume One, available at 

5 For details and sources, see my book Explaining the Crisis, p52. 

6 See, for Germany, G Bry, Wages in Germany 1871-1945 (Princeton, 1960), 



p74; A V Desai, Real Wages in Germany (Oxford, Clarendon, 1968), ppl5-16 
and p35. 

7 See the detailed account of the trend of working hours in the 20th century 
inBKHunnicutt, Work Without E«<f (Philadelphia,Temple, 1988). 

8 Edward Bernstein, Evolutionary Socialism (London, ILP, 1909), pp80 and 83. 

9 As above, p2 19. 

10 R Hilferding, Finance Capital, p304. 

11 As above. 

12 As above, p325. 

13 As above, p366. 

14 As above, p235. 

15 As above, pp289-290. 

16 As above, p294. 

17 As above. 

18 See William Smaldone, Rudolf Hilferding (Bonn: Dietz, 2000), pl05. 

19 M Salvadori, Karl Kautsky and the Socialist Revolution, 1 880-1938 
(London, Verso, 1979), pl71. 

20 From Karl Kautsky, "Imperialism and the War", International Socialist 
Review (November 1914), available 

21 J A Hobson, Imperialism: A Study (New York, 1902), available at 

22 For details see Barry Eichengreen, Globalised Finance (Princeton, 2008), p34. 

23 Norman Angell, The Great Illusion (Toronto, McClelland & Goodchild, 1910), 
p269, available at 

24 Nigel Harris, "All Praise War", International Socialism, 102 (2004). 

25 Ellen Meiksins Wood, "Logics of Power", Historical Materialism 14:4 
(2006), p23. 

26 As above, p22. 

27 Michael Hardt, "Folly of our Masters of the Universe", Guardian, 18 
December 2002. 

28 N I Bukharin, Imperialism and World Economy (London, Merlin, 1972), 
available at 

29 VI Lenin, Imperialism: The Highest Stage of Capitalism (London, 1933 
[1916]). Lenin's book was published before Bukharin's and is better known. 
But Bukharin actually wrote his book first. 

30 As above, p24. 

31 As above, p60. 

32 As above, pi 08. 

33 As above, p69. 

34 As above, Chapter 7, "Imperialism, as a Special Stage of Capitalism". 

35 Nicolai Bukharin, Imperialism and World Economy, Chapter 10, 
"'Reproduction of the Processes of Concentration and Centralisation of 
Capital on a World Scale". 

36 Nicolai Bukharin, Economics of the Transformation Period (New York, 
Bergman, 1971), p36. 

37 Nicolai Bukharin, Imperialism and World Economy, ppl24-127. 

38 Rosa Luxemburg and Nicolai Bukharin, Imperialism and the Accumulation 
of Capital (Allen Lane, 1972), p267. 

39 See, for instance, Ellen Meiksins Wood, "Logics of Power: A Conversation 
with David Harvey," in Historical Materialism, 14, no 4, p23. 

40 Figures from H Feis, Europe: The World's Banker: 1879-1914, quoted in M 



Kidron, "Imperialism: The Highest Stage But One", in International 
Socialism, 9 (first series, 1962), pi 8. 

41 The argument and the figures for this are provided by M Barratt Brown, The 
Economics of Imperialism (Harmondsworth, Penguin, 1974), pl95. 

42 For one of the first recognitions of this limitation of too literal applications 
of Lenin's theory, see Tony Cliff, "The Nature of Stalinist Russia" (1948), in 
T Cliff, Marxist Theory after Trotsky (London, Bookmarks, 2003), pi 17. 

43 VI Lenin, Imperialism: The Highest Stage of Capitalism, Chapter 3, 
"Finance Capital and the Financial Oligarchy". 

44 Nicolai Bukharin, Imperialism and World Economy, pi 14. 

45 Nicolai Bukharin, Imperialism and the Accumulation of Capital, p256. 

46 As above, p267. 

47 Rosa Luxemburg, The Accumulation of Capital (London, Routledge, 1963). 

48 Rosa Luxemburg, Accumulation of Capital, An Anti-Critique, in Rosa 
Luxemburg and Nikolai Bukharin, Imperialism and the Accumulation of 
Capital, p74. 

49 Nicolai Bukharin, Imperialism and the Accumulation of Capital, pi 80. 

50 As above, p224. 

51 See the discussion in Chapter Three earlier. 

52 Henryk Grossman, The Law of Accumulation and the Breakdown of the 
Capitalist System, p98. 

53 Figures from Colin Clarke, "Wages and Profits", Oxford Economic Papers, 

54 See "Figure 2: Net Returns on Capital in the UK, 1855-1914", in A J Arnold 
and S McCartney, "National Income Accounting and Sectoral Rates of 
Return on UK Risk-Bearing Capital, 1855-1914", Essex University Working 
Paper, 2003. 

55 For a full exposition of Marx's various views on the state, see Hal Draper, 
Karl Marx's Theory of Revolution: State and Bureaucracy (New York, 
Monthly Review, 1979). 

56 Graph available at 

57 For a forceful criticism of this view, see Justin Rosenberg, The Empire of 
Civil Society (London, Verso, 199 A). 

58 This was an important point made by Colin Barker in discussing various 
versions of the "capital derivation" theories of the state in his articles, "The 
State as Capital", International Socialism, 1 (1978); "A Note on the Theory 
of the Capitalist State", Capital and Class, 4 (1978). 

59 Marx abstracted from the existence of many capitals in competition from each 

other in the early parts of Volume One of Capital, in order to avoid confusing 
the general dynamic of the system and its units with the continual ups and 
downs caused by the particular impacts of capitals on each other (eg oscilla- 
tions of prices around their values). But this did not mean that he held that 
capitalism could exist simply as a single capital not facing competition. In the 
same way, it can be useful for some purposes to treat the abstract features of 
the capitalist state, but the concrete capitalist state does not exist in isolation 
from other states and the interplay of capitals. Marx recognised this when in 
his original plan for Capital the volume to deal with the state was due to 
appear after the volumes dealing with the interplay of different capitals in the 
circulation process, the distribution of surplus value between different capitals, 
the rate of profit, rent and so forth. 

60 Ellen Meiksins Wood, "Logics of Power", p25. Even David Harvey, who 



accepts there is an economic rationale to imperialism, writes at one point of 
"territorial and capitalist logics of power"! as distinct from each other. See 
David Harvey, The New Imperialism, p29. 

61 See "Two Insights do not Make a Theory", International Socialism, 100 
(first series, 1977). 

62 My limited knowledge of these debates is indebted to a paper presented at 
the November 2005 conference organised by Historical Materialism in 
London. See Oliver Nachtwey and Tobias ten Brink, "Lost in Transition — 
the German World Market Debate in the 1970s", Historical Materialism, 
16:1 (2008), pp37-71. For some of the key writers see Wolfgang Mueller and 
Christel Neusuess, "The 'Welfare State Illusion' and Contradictions between 
Wage Labour and Capital"; Elmer Alvater, "Some Problems of State 
Interventionism"; Joachim Hirsch, "The State Apparatus and Social 
Reproduction", in John Holloway and Sol Piccioto (eds), State and Capital, 
A Marxist Debate (London, Edward Arnold, 1987). 

63 This is a summary of her argument provided by Nachtwey and Brink based 
on her "Kapitalakkumulation im Weltzusammenhang", in H-G Backhaus 
(ed), Gesellschaft, Beitrage zur Marxschen Theorie 1 (Frankfurt/Main, 1974). 

64 This description of states negotiating on behalf of national capitalisms con- 
trasts with his argument that the military adventures of the US state have not 
had any economic role (a point he made, for instance, in his contribution to 
the discussion on imperialism at the Historical Materialism conference in 
London in November 2007). 

65 Frederick Engels, On the Decline of Feudalism and the Emergence of National 
States, in Marx and Engels, Collected Works, Volume 26, pp556-565. 

66 VI Lenin, The Right of Nations to Self Determination, in V I Lenin, Collected 
Works, Volume 20 (Moscow, Progress Publishers, 1972), p396, available at 
http://www.marxists.Org/archive/lenin/works/l 9 1 4/self-det/ch0 1 .htm 

67 Heide Gerstenberger, Impersonal Power: History and Theory of the 
Bourgeois State (Leiden, Brill, 2007) brings out very clearly the difference 
between the precapitalist state and the modern state, but confuses things by 
lumping together absolutist and fully capitalist states like that of Britain in 
the 18th and well into 19th century as "ancien regimes". See the review of 
her book by Pepijn Brandon, International Socialism, 120 (2008). 

68 For a much fuller development of this argument, see my article "The State and 
Capitalism Today", International Socialism, 2:51(1991), pp3-57, available at 
http : //www. i s j . org . uk/ ? id=2 3 4 

69 Volume Two of Marx's Capital spells out the relation between the three 
forms once productive capitalism has established itself. 

70 Neil Brenner, "Between Fixity and Motion: Accumulation, Territorial 
Organization and the Historical Geography of Spatial Scales", University of 
Chicago, 1998, available at 
.EPd. 1998.pdf 

71 For an account of this, see W Ruigrok and R van Tulder, The Logic of 
International Restructuring (London, Taylor and Francis, 1995), pi 64. 

72 For a useful discussion on the literature about these networks, see J Scott, 
Corporations, Classes and Capitalism (London, Hutchinson Educational, 

73 Costas Lapavitsas, "Relations of Power and Trust in Contemporary 
Finance", Historical Materialism, 14:1 (2006), pl48. 

74 Costas Lapavitsas, "Relations of Power and Trust in Contemporary 
Finance", pi 50. 



75 VI Lenin, Imperialism: The Highest Stage of Capitalism, p60. 

76 Claus Offe, Contradictions of the Welfare State (London, Hutchinson, 
1984), p49. 

77 Antonio Gramsci, Selections from Prison Notebooks (New York, 
International Publishers, 1971), pi 70. 

78 What are sometimes called "ruling blocs". 

79 All quotes from Karl Marx, the first draft of The Civil War in France, in Marx 
and Engels, Collected Works, Volume 22, p483, available at http://www 

80 It is this view which enables Harvey to see privatisation as a form of "accumu- 
lation by dispossession" of productive activities "outside of capitalism". See 
David Harvey, The New Imperialism, (Oxford University Press, 2005) pl41. 

81 In countries like Italy or Brazil this could be half of total productive investment; 
in the case of the United States arms expenditure was equal to total productive 
investment for long periods of time. 

82 Marx, Capital, Volume Three, pp862-863. 

83 Karl Marx, "Transformation of Money into Capital", Manuscripts of 1861-3, 
in Marx and Engels, Collected Works, Volumes 30 and 33, available at 

84 R Hilferding, Finance Capital. 

85 This, for instance, is the position implied by Fred Moseley in his study of the 
rate of profit in the US when he excludes the state sector from his calculations — 
see his The Falling Rate of Profit in the Post War United States Economy. 

86 Marx, Capital, Volume Two, p97. 

87 Frederick Engels, "Socialism Scientific and Utopian", in Marx, Engels, 
Lenin, The Essential Left, pp71-72. 

88 Karl Kautsky, The Class Struggle (also known as "The Erfurt Programme"), 
Chapter Four http://www.marxists.Org/archive/kautsky/l 892/erfurt/ch04.htm 

89 Leon Trotsky, The First Five Years of the Communist International, Volume 
One (New York, Pathfinder Press, 2009). 

90 Marx, Capital, Volume One, p78. 

91 Tony Cliff, The Nature of Stalinist Russia. Cliff was drawing out the impli- 
cation of Bukharin's account in Imperialism and the World Economy. 

Chapter Five: State Spending and the System 

1 See Marx's comments on Smith in this regard in Karl Marx, Theories of 
Surplus Value, Volume One (Moscow, nd), ppl70 and 291. 

2 "Productive and unproductive labour is here throughout conceived from the 
standpoint of the possessor of money, from the standpoint of the capitalist, 
not from that of the workman", as above, pl55. 

3 As above, pl56. 

4 Marx, Capital, Volume One, pi 92. 

5 Guglielmo Carchedi, Frontiers of Political Economy, p40. 

6 According to Enrique Dussel, Marx's argument in his notebooks is that 
"unproductive labour" will, "with only minor exceptions, only perform 
personal services". Enrique Dussel, Towards An Unknown Marx (Routledge, 
2001), P 69. 

7 Marx, Theories of Surplus Value, Volume One, pi 70. 

8 Marx, Capital, Volume Three, p293. 

9 Jacques Bidet, Exploring Marx's Capital (Leiden, Brill, 2007), ppl04-121. 

10 Marx, Capital, Volume Three, p296. 

11 Marx, Capital, Volume Two, pi 3 7. 



12 See Table F.l, in Anwar Shaikh and E A Tonak, Measuring the Wealth of 
Nations (Cambridge University Press, 1996), pp298-303. 

13 Fred Moseley, The Falling Rate of Profit in the Post War United States 
Economy, pl26. 

14 Simon Mohun, "Distributive Shares in the US Economy, 1964-2001", 
Cambridge Journal of Economics, 30:3 (2006), Figure 6. 

15 Michael Kidron, "Waste: US 1970", in Capitalism and Theory, pp37-39. 

16 Alan Freeman, "The Indeterminacy of Price- Value Correlations: A Comment 
on Papers by Simon Mohun and Anwar Shaikh", available at http://mpra.ub 

17 Guglilmo Carchedi, Frontiers of Political Economy, pp83-84. 

18 Michael Kidron, "Waste: US 1970", in Capitalism and Theory, p56. 

19 Marx, Theories of Surplus Value, Volume One, pi 70. 

20 Karl Marx, Grundrisse, pp 75 0-751. 

21 The Grundrisse was not published in English until 1973. 

22 Michael Kidron, "International Capitalism", International Socialism 20 
(first series, 1965), plO, available at 
kidron/works/1965/xx/intercap.htm. Carchedi recognises the different effect 
of production of nonreproductive goods (which he calls "non- basic", using 
the terminology of the Ricardians he is criticising) on the dynamic of accu- 
mulation without explicitly drawing Kidron's conclusion about the rate of 
profit. "Non-basics cannot", he writes, "be the transmission belt through 
which value changes in the previous production process are carried into the 
next one" — G Carchedi, Frontiers of Political Economy, p83. 

23 Michael Kidron, Capitalism and Theory, pi 6. 

24 Michael Kidron, "Capitalism: the Latest Stage", in Nigel Harris and John 
Palmer, World Crisis (London, Hutchinson, 1971), reprinted in Capitalism and 
Theory, ppl6-17. For a longer exposition of this insight which takes up criti- 
cisms from Ernest Mandel, see my Explaining the Crisis, pp39-40 and 159-160. 

25 Henryk Grossman, The Law of Accumulation, ppl57-158. 

26 T S Ashton, The Industrial Revolution (London, Oxford University Press, 
1948), ppll2-113. They did then have to enforce on them their own discipline 
of work, timed by the clock. See E P Thompson, "Time and Work-Discipline", 
in Customs in Common (London, Penguin, 1993), pp370-400. 

27 For a development of this argument with historical references, see Suzanne 
de Brunhoff, The State, Capital and Economic Policy (London, Pluto, 1978), 

28 See Lindsey German, Sex, Class and Socialism (London, Bookmarks, 1989), 

29 T H Marshall, Social Policy (London, Hutchinson, 1968), pp46-59. 

30 Ann Rogers, "Back to the Workhouse", International Socialism 59 (1993), pi 1. 

3 1 Hansard, Parliamentary Debates, 1 7th February, 1 943, Col 1 8 1 8. 

32 Quoted in T H Marshall, Social Policy, pi 7. 

33 Notoriously, the attack on public sector employment, Robert Bacon and 
Walter Eltis, Britain's Economic Problem: Too Few Producers (New York, St 
Martin's, 1976). 

34 Marx's term in Capital, Volume One, p349. 

35 If they are counted as part of constant capital, this is a peculiar form of con- 
stant capital that can walk away from the firm and work elsewhere, and in 
some interpretations this leads to the view of skilled workers as in some way 
possessors of their own "human capital" and a part of their wages is viewed 
as a "return" on this capital. It should be added, however, that disputes over 



this question can be in danger of turning into pure scholasticism, since in any 
case the costs of training add to the investment costs of a firm. At the same 
time, insofar as training is generalised across the system as a whole, it in- 
creases average labour productivity and so serves to reduce the value in terms 
of socially necessary labour of each unit of output — and in doing so reduces 
the gains accruing to the individual capitalist from undertaking the training. 

36 The "free rider" problem: see, for instance, Mary O'Mahony, "Employment, 
Education and Human Capital", in R Floud and P Johnson, The Cambridge 
Economic History of Modern Britain, Volume Three (Cambridge University 
Press, 2004). 

37 Assuming the labour they train is going to end up as productive labour. 

38 See Richard Johnson, "Notes on the Schooling of the English Working Class 
1780-1850", in Roger Dale and others (eds), Schooling and Capitalism 
(London, Routledge & Kegan Paul, 1976), pp44-54. See also Steven Shapin and 
Barry Barnes, "Science, Education and Control", in the same volume, pp55-66. 

39 For a full account of developments in the major industrial countries of the 
time, see Chris McGuffie, Working in Metal (London, Merlin, 1985). 

Chapter Six: The Great Slump 

1 Charles Kindleberger, The World in Depression 1929-39 (London, Allen 
Lane, 1973), pi 17. See also Albrecht Ritschl and Ulrich Woitek, "What Did 
Cause the Great Depression?", Institute for Empirical Research in 
Economics, University of Zurich Working Paper 50, 2000, pl3. 

2 See the estimates for GNP in Angus Maddison, "Historical Statistics for the 
World Economy: 1-2003 AD", available at: 

3 For a much more detailed account of the spread of the crisis, with sources, 
see my Explaining the Crisis, pp55-62. 

4 See figures given in Fritz Sternberg, The Coming Crisis (London, Victor 
Gollancz, 1947), p23; Lewis Corey, The Decline of American Capitalism 
(London, Bodley Head, 1935), p27. Available at 

5 Quoted in R Skidelsky, John Maynard Keynes, Volume 2 (London, 
Macmillan, 1994), p341. 

6 Quoted in W Smaldone, Rudolf Hilferding, pi 05. 

7 See, for instance, Randall E Parker, Economics of the Great Depression, pl4. 

8 See the summary of the Austrian view by Randall E Parker, Economics of the 
Great Depression, pp 9-10. See also F A Hayek, Pure Theory of Capital 
(London, Routledge and Keegan Paul, 1941), p408, and Profit, Interest and 
Investment (London, Routledge, 1939) pp33, 47-49, and 173. For a very 
good contemporary exposition of Hayek's position see John Strachey, The 
Nature of Capitalist Crisis (London, Victor Gollancz, 1935), pp56-82. 

9 Figures given by Corey in The Decline of American Capitalism. Robert 
Brenner and Mark Glick, "The Regulation Approach: Theory and History", 
New Left Review, 1:188 (1991), argue that wages rose sharply in the years 
before the Crash, but the graph they provide from S Lebergott, Manpower in 
Economic Growth (New York, McGraw-Hill, 1964) only suggests a rise of 
about the same level as Corey's figures. 

10 Michael A Bernstein, The Great Depression (Cambridge University Press, 
1987), pi 87. He adds that for the population as a whole it rose 13 percent, 
and for the top 1 percent of the non-farm population the figure was 63 percent. 

1 1 Robert J Gordon, "The 1920s and the 1990s in Mutual Reflection", paper 



presented to economic history conference, Duke University, pp26-27 March, 

12 Alvin Hansen, Full Recovery or Stagnation (London, Adam and Charles 
Black, 1938), pp290-291. Hansen's figures were for 1924-29. 

13 Simon Kuznets, Capital in the American Economy (Oxfor University Press, 
1961) p92. 

14 Joseph Gillman, The Falling Rate of Profit (London, Dennis Dobson, 1956), 
P 27. 

15 Joseph Steindl, Maturity and Stagnation in the American Economy (London, 
Blackwell, 1953), pl55 and following. 

16 Alvin Hansen, Full Recovery or Stagnation, p296. 

17 As above, pp296 and 298. 

18 See the calculations in Lewis Corey, The Decline of American Capitalism, 
Chapter 5. 

19 As above, pl70. 

20 Barry Eichengreen and Kris Mitchener, "The Great Depression as a Credit 
Boom Gone Wrong", Bank of International Settlements, Working Papers 
Nol37, September 2003. Available at 
.pdf ?noframes= 1 

21 L Corey, The Decline of American Capitalism, pi 72. Compare also Gillman, 

22 Barry Eichengreen and Kris Mitchener, "The Great Depression as a Credit 
Boom Gone Wrong". 

23 See, for instance, the account given by E A Preobrazhensky in The Decline of 
Capitalism (M E Sharp, 1985), pl37. 

24 See, for instance, Robert J Gordon, "The 1920s and the 1990s in Mutual 

25 C Kindleberger, The World in Depression 1929-39, pll7. 

26 Marx, Capital, Volume Three, p473. 

27 Alvin Hansen, Economic Stabilization in an Unbalanced World (Fairfield, 
NJ, AMKelley, 1971 [1932]), P 81. 

28 C Kindleberger, The World in Depression 1929-39, pll7. 

29 Milton Friedman and Anna Schwartz, The Great Contraction 1929-33 
(Princeton University Press, 1965), p21. 

30 John Strachey's 1935 account of these contradictory arguments still makes 
powerful reading today. See Strachey, The Nature of the Capitalist Crisis, 
pp39-119. For interviews with past and present mainstream economists 
putting forward different interpretations, see the two volumes by Randall E 
Parker, Reflections on the Great Depression (Edward Elgar, 2002) and The 
Economics of the Great Depression. 

31 J M Keynes, General Theory of Employment, Interest and Money, pi 64. 

32 As above, p59. 

33 As above, ppl61-162. 

34 As above, ppl35-136 and 214. 

35 As above, p2 19. 

36 As above, p316. 

37 As above, p221. For Keynes's account of the "marginal efficiency of capital" 
and its tendency to "diminish", see ppl35-136, 214, and especially, 314-324. 
For a comparison of Keynes's position with Marx's, see Lefteris Tsoulfidis, 
"Marx and Keynes on Profitability, Capital Accumulation and Economic 
Crisis", available at 



38 Hayek's recognition of the physical as well as the value character of production 
distinguishes his writings from those of most of the rest of the marginalist neo- 
classical school. He admits the importance of Marx in developing such ideas. 
See F A Hayek, Prices and Production, pi 03. This provides him with certain 
insights missing in Keynes, despite the much more reactionary conclusions 
Hayek draws. He was too honest for many of his disciples, who can't accept 
the implication that crises are inevitable. 

39 FA Hayek, Prices and Production, quoted in Strachey, The Nature of the 
Capitalist Crisis, pi 08. 

40 See the calculations in Joseph Gillman, The Falling Rate of Profit', Shane 
Mage, "The Law of the Falling Rate of Profit: Its Place in the Marxian 
Theoretical System and its Relevance for the US Economy" (PhD thesis, 
Columbia University, 1963, released through University Microfilms, Ann 
Arbor, Michigan); Gerard Dumenil and Dominique Levy, The Economics of 
the Profit Rate (Edward Elgar, 1993), p254; Lewis Corey, The Decline of 
American Capitalism gives figures for the 1920s only. 

41 For profitability before 1914, see Tony Arnold and Sean McCartney, "National 
Income Accounting and Sectoral Rates of Return on UK Risk-Bearing Capital, 
1855-1914", Essex University Working paper, November 2003, available at For 
profitability before and after the First World War, see Ernest Henry Phelps 
Brown and Margaret H Browne, A Century of Pay (London, Macmillan, 
1968), pp412 and 414; tables 137 and 138. 

42 Theo Balderston, "The Beginning of the Depression in Germany 1927-30", 
Economic History Review, 36:3 (1985), p406. 

43 Calculations from Joseph Gillman, The Falling Rate of Profit, p58; Shane 
Mage, "The Law of the Falling Rate of Profit", p208; and Gerard Dumenil 
and Dominique Levy, The Economics of the Profit Rate, p248 (figure 14.2). 

44 These are to be found in Marx, Capital, Volume 3, part V. 

45 This is interpreting Grossman's account as showing how capitalism is driven 
to extreme crises, not to a breakdown from which it has no escape. See Rick 
Kuhn, "Economic Crisis and Social Revolution", School of Social Science, 
Australian National University, February 2004, pi 7. 

46 E A Preobrazhensky, The Decline of Capitalism, pp33 and 29. Preobrazhensky 
was, however, vague as to how this impeded recovery from the crisis. Like many 
Marxist economists of the first decades of the 20th century he did not pay much 
attention to the passages in Marx on the tendency of the rate of profit to fall. 

47 Michael Bleaney, The Rise and Fall of Keynesian Economics (London, 
Macmillan, 1985) p47. 

48 Charles Kindleberger, The World in Depression 1929-39, p272. 

49 Figures given in Fritz Sternberg, Capitalism and Socialism on Trial (London, 
Victor Gollanz 1951), p353; Arthur Schweitzer, Big Business in the Third 
Reich (Bloomington, Indiana University Press, 1964), p336. 

50 Arthur Schweitzer, Big Business in the Third Reich, p335. 

51 See Chapter Four. 

52 Chris Harman, Explaining the Crisis, p71. 

53 Fritz Sternberg, Capitalism and Socialism on Trial, pp494-495. 

54 A D H Kaplan, The Liquidation of War Production (New York, McGraw- 
Hill, 1944), P 91. 

55 As above, p3. 

56 John Kenneth Galbraith, American Capitalism (Transaction Publishers, 1993), 
p65. The view that the depression only really ended with the war is accepted by 



most of the mainstream economists interviewed in Parker's two volumes. 

57 The view of Paul Sweezy and Paul Baran in the US, of the editorial team of 
New Left Review in Britain, the left wing of European social democracy, and 
of the great majority of academic Marxists. 

58 Trotsky had developed this notion in the 1930s, and it continued to be 
accepted by supposedly "orthodox" Trotskyists until the collapse of the 
USSR in 1991 — and in a few cases even afterwards. 

59 M Reiman, The Birth of Stalinism (London, Taurus, 1987), pp37-38, provides 
an account of the crisis based on internal documents. 

60 As above, p89. 

61 Joseph Stalin, Problems of Leninism, quoted in Isaac Deutscher, Stalin 
(London, Oxford University Press, 1961), p328. 

62 Stalin, quoted in E H Carr and R W Davies, Foundations of a Planned 
Economy, Volume One (London, Macmillan, 1969), p327. 

63 E A Preobrazhensky, The Decline of Capitalism, pi 66. 

64 Lewis Corey, The Decline of American Capitalism, p484. His concept of de- 
cline did not rule out short periods of growth, but with "shorter upswings" 
and longer "depressions". 

65 John Strachey, The Nature of Capitalist Crisis, pp3 75-376. 

66 E A Preobrazhensky, The Decline of Capitalism, pi 59. 

67 Leon Trotsky, The Death Agony of Capitalism and the Tasks of the Fourth 
International (1938), available at 

Chapter Seven: The Long Boom 

1 I use the term "Western" as short for "Western style", in contrast to the 
"Eastern bloc" countries. 

2 Albert Fishlow, "Review of Handbook of Development Economics", Journal 
of Economic Literature, Volume XXIX (1991), pl730. 

3 Monetary measures were included in the conventional Keynesian tool kit, 
although Keynes had been sceptical about their efficacy. 

4 J M Keynes, General Theory of Employment, Interest and Money, ppl35-136, 
214, 219 and 376. 

5 As above, p376. 

6 As above, p378. 

7 Robert Skidelsky, John Maynard Keynes, Volume 2, p60. 

8 Generally called "orthodox Keynesianism" or "the post-war synthesis" 

9 J Robinson, Further Contributions to Economics. 

10 J Strachey, Contemporary Capitalism (London, Gollanz, 1956), p2 35. 

11 As above, p239. 

12 The most recent is Dan Atkinson and Larry Elliot, The Gods that Failed 
(Bodley Head, 2008). 

13 See, for instance, Will Hutton, The State We're In (Jonathan Cape, 1995). 

14 Graham Turner, The Credit Crunch (Pluto, 2008). Turner looks to a mixture 
of the ideas of Keynes and the pre-war monetarist Irving Fisher. 

15 Gerard Dumenil and Dominique Levy, Capital Resurgent: Roots of the 
Neoliberal Revolution (Cambridge, Harvard University Press, 2004), pi 86. 

16 David, Harvey, A Brief History of Neoliberalism, plO. 

17 R C O Matthews, "Why has Britain had Full Employment Since the War?", 
Economic Journal, September 1968, p556. 

18 Meghnad Desai, Testing Monetarism (London, Frances Pinter, 1981), p76. 
See also Robert Brenner, The Economics of Global Turbulence, p94. 



19 Ton Notermans, "Social Democracy and External Constraints", in K R Cox 
(ed), Spaces of Globalisation (Guildford Press, 1997), p206. 

20 Michael Bleaney, The Rise and Fall of Keynesian Economics (London, 
Macmillan, 1985), plOl. 

21 P Aglietta, Theory of Capitalist Regulation (London, New Left Books, 
1979), pl65. 

22 Robert Brenner and Mark Glick, "The Regulation Approach: Theory and 
History", New Left Review, 1:188 (1991). For my own, earlier, criticism of 
the Regulation School, see Explaining the Crisis, pp 143-146. 

23 See Gerard Dumenil and Dominique Levy, The Economics of the Profit Rate, 
Figure 14.2, p248. For various interpretations of the rate of profit in these 
decades, see Shane Mage, "The Law of the Falling Tendency of the Rate of 
Profit"; Joseph Gillman, The Falling Rate of Profit; William Nordhaus, 
Brookings Papers on Economic Activity, 5:1 (1974); Victor Perlo, "The 
New Propaganda of Declining Profit Shares and Inadequate Investment", 
Review of Radical Political Economics, 8:3 (1976); Martin Feldstein and 
Lawrence Summers, "Is the Rate of Profit Falling?", Brookings Papers 
1:1977, p216; Robert Brenner, The Economics of Global Turbulence; Fred 
Moseley, The Falling Rate of Profit in the Post War United States Economy; 
Anwar Shaikh and E A Tonak, Measuring the Wealth of Nations. Different 
ways of measuring are used, and the figures differ somewhat from each 
other, with some showing a long-term decline and some a dip in the mid 
1950s. But none of them show a fall to the level of the first three decades of 
the 20th century, or to the level of the late 1970s. 

24 Shane Mage, "The 'Law of the Falling Rate of Profit'", p228. 

25 Michael Kidron, "A Permanent Arms Economy", International Socialism, 
28 (first series, 1967), available at 
works/ 196 7/xx/permarms. htm 

26 For a longer discussion on the analyses of Baran, Sweezy and Steindl, see the 
Appendix, "Other Theories of the Crisis", in my book Explaining the Crisis. 

27 Michael Bleaney, The Rise and Fall of Keynesian Economics, pi 04. 

28 Mage argues that it rose 45 percent 1946-60. See "The Law of the Falling 
Tendency of the Rate of Profit", p229; Gillman argues that the ratio of the 
stock of fixed capital to labour employed more than doubled between 1880 
and 1900, but grew by only 8 percent between 1947 and 1952; Dumenil and 
Levy show the capital-output ratio for the US nearly doubling between 1945 
and 1970, but quadrupling for West Germany, France and Britain combined 
(Dumenil and Levy, Capital Resurgent, Figure 5.1, p40). They also show 
(pi 44) output per unit of capital invested (the "productivity of capital") as 
falling by about a third in the last two decades of the 19th century for the 
US, but remaining more or less fixed from 1950 to 1970 — this ratio tends to 
move in the inverse direction to the organic composition. 

29 See Michael Kidron, Western Capitalism Since the War (London, Weidenfeld 
and Nicolson, 1968). For earlier versions of a "permanent war economy" 
theory, see the article by T N Vance (also known as Walter Oakes) in Hal 
Draper (ed), The Permanent Arms Economy (Berkeley, 1970). 

30 John Kenneth Galbraith, The New Industrial State (Princeton University 
Press, 2007), p284. 

31 As above, pp33-34. 

32 As above, p2. 

33 E Alvater and others, "On the Analysis of Imperialism in the Metropolitan 
Countries", Bulletin of the Conference of Socialist Economists (Spring 1974). 



34 K Hartani, The Japanese Economic System (Lanham, Lexington Books, 
1976), pl35. 

35 Miyohai Shonoharu, Structural Changes in Japan's Economic Development 
(Tokyo, Kinokuniya Bookstore Co, 1970), p22. 

36 Robert Brenner, The Economics of Global Turbulence, p94. 

37 The phrase used by Tony Cliff. 

38 Kidron estimated that this resulted in a total transfer of value to the devel- 
oped countries in 1971 of over $14 billion dollars — Michael Kidron, 
Capitalism and Theory, pi 06. 

39 See Anwar Shaikh, "Who Pays for the 'Welfare' in the Welfare State?", 
Social Research, 70:2, 2003, 
welfare_ state.pdf 

40 For Britain, see, for instance, Social Trends (1970), which showed that the 
vast bulk of increasing educational expenditure was concentrated in these 
areas, while primary education expenditures hardly grew at all. 

41 James O'Connor, The Fiscal Crisis of the State (Transaction Publishers, 
2001), pl38. 

42 Figures from Alex Nove, An Economic History of the USSR (London, Allen 
Lane, 1970), p387. 

43 See the figures in V Cao-Pinna and S S Shatalin, Consumption Patterns in 
Eastern and Western Europe (Oxford, Pergamon, 1979), p62. 

44 Figures from Alex Nove, An Economic History of the USSR, p387. Angus 
Maddison's more recent calculations suggest the output of the USSR grew about 
three-fold between 1945 and 1965, slightly faster than the 19 states he includes 
in Western Europe and more than 50 percent faster than the US. http:// 

45 Pravda, 24 April 1970. 

46 This was a key insight of Tony Cliff in "The Nature of Stalinist Russia" 
[1948], reprinted in Marxist Theory After Trotsky, pp80-92. 

47 D W Conklin, "Barriers to Technological Change in the USSR", Soviet 
Studies (1969), p359. 

48 Josef Goldman and Karel Korba, Economic Growth in Czechoslovakia 
(White Plains, NY, International Arts and Sciences Press, 1969). 

49 Branko Horvat, "Business Cycles in Yugoslavia", Eastern European 
Economics, Volume X, pp3-4 (1971). 

50 Raymond Hutchings, "Periodic Fluctuation in Soviet Industrial Growth Rates", 
Soviet Studies, 20:3 (1969), pp331-352. The unevenness from year to year is 
shown clearly in Madison's figures for GDP, see horizontal-file_03-2007.xls 

51 F Sternberg, Capitalism and Socialism on Trial, p538. 

52 For details, see my book, Class Struggles in Eastern Europe 1945-83 
(London, Bookmarks, 1988), pp42-49. 

53 New York Times, 5 July 1950, quoted in T N Vance, "The Permanent War 
Economy", New International, January-February 1951. 

54 M Kidron, "Imperialism: The Highest Stage but One", in Capitalism and 
Theory, pl31. 

55 J Stopford and S Strange, Rival States, Rival Firms (Cambridge University 
Press, 1991), pl6. 

56 For a succinct account of the role played by Israel as a tool for imperialism 
see John Rose, Israel, The Hijack State (London, Bookmarks, 1986), avail- 
able at 

57 See the fascinating account of how Malay nationalists used ethnic riots 
against the country's Chinese minority to stage a "coup" committed to the 



path of "state capitalist" development of industries under their own con- 
trol — Kua Kia Soong, "Racial Conflict in Malaysia: Against the Official 
History", Race & Class, 49 (2008), pp33-53. 

58 World Bank, World Development Report, 1991, pp33-34 

59 For summaries of these arguments, see I Roxborough, Theories of 
Underdevelopment (London, Macmillan, 1979), Chapter 3; Nigel Harris, The 
End of the ThirdWorld (Harmondsworth, Penguin, 1987) and R Prebisch, 
"Power Relations and Market Forces", in K S Kim and DF Ruccio, Debt and 
Development in Latin America (South Bend, Notre Dame, 1985), pp9-31. 

60 I Roxborough, Theories of Underdevelopment, pp27-32. 

61 A Gunder Frank, "The Development of Underdevelopment", Monthly 
Review, September 1966. 

62 As Roxborough points out, Gunder Frank "never claimed to be a Marxist", 
Theories of Underdevelopment, p49. 

63 P Baran, The Political Economy of Growth (Harmondsworth, Penguin, 
1973), p399. 

64 P Baran, The Political Economy of Growth, p416. 

65 A Gunder Frank, Capitalism and Underdevelopment in Latin America 
(Harmondsworth, Penguin, 1971), pp35-36. 

66 Despite Baran's preparedness to criticise certain features of Stalin's rule, he 
quoted Stalin favourably himself and accepted Stalinist claims about the 
USSR's agricultural performance and living standards that were completely 
false. See, for example, P Baran, The Political Economy of Growth, p441. 

67 Nigel Harris, "The Asian Boom Economies", International Socialism, 3 
(1978-9), p3. 

68 Lenin, Imperialism, Chapter 4, "The Export of Capital". 

69 Leon Trotsky, The Third International After Lenin (New York, Pioneer, 
1957), pl8. 

70 Leon Trotsky, The Third International After Lenin, p209. 

71 See the comparison of Italian and Argentinian growth rates in M A Garcia, 
"Argentina: El Veintenio Desarrollista", in Debate, 4 (1978), p20. 

72 "Argentina", Citta Future Anno Vi, 1 (Rome, nd), p3. 

73 Figures given in Geisa Maria Rocha, "Neo-Dependency in Brazil", New Left 
Review, 2:16 (2002). 

74 Economist, 29 March 1986. 

75 Press release summarising a report for the World Bank by Benno Ndulu, Facing 
the Challenges of African Growth, available at 

76 Bill Warren, "Imperialism and Capitalist Industrialization", New Left 
Review, 1:81 (1973). 

77 As above. 

78 As above. 

79 As above. 

80 Leon Trotsky, The Third International After Lenin, p209. 
Chapter Eight: The End of the Golden Age 

1 For details see, for instance, Robert Brenner, The Economics of Global 
Turbulence, ppl39 and 146. For a contemporary attempt to analyse the 
inflation of 1970, see "Survey: The Economy", in International Socialism, 
46 (first series, 1971). 

2 Guardian, 26 September 1983. 



3 Joan Robinson, Further Contributions to Economics, p36. 

4 Quoted in the Guardian, 15 September 1994. 

5 Frederic Lee, "The Research Assessment Exercise, the State and the 
Dominance of Mainstream Economics in British Universities", Cambridge 
Journal of Economics, Volume 31: 2 (2007). 

6 William Keegan, Mrs Thatcher's Economic Experiment (Harmondsworth, 
Penguin, 1984), pl26. 

7 William Keegan, Mr Maudling's Gamble (London, Hodder and Stoughton, 
1989), pl44. 

8 As above, ppl03 and 127. 

9 As above, pi 73. 

10 See R W Garrison, "Is Milton Friedman a Keynesian?" in M Skousen (ed), 
Dissent on Keynes (New York, Praeger, 1992), pl31. 

11 H H Happe, in M Skousen (ed), Dissent on Keynes, p209. 

12 J R Schumpeter, Capitalism, Socialism and Democracy, pi 03. 

13 Schumpeter had tried to explain why expansion took place at different 
speeds at different points in the history of capitalism by reference to "long 
waves", based upon the differing tempos of innovation. But since innovation 
depends on the wider dynamics of the system, it is hardly an explanation of 
the latter. For a long discussion on these matters see my book, Explaining 
the Crisis, pp 132- 13 6. 

14 Ton Notermans, "Social Democracy and External Constraints", in Kevin R 
Cox, Spaces of Globalisation. 

15 Companies will often do their best to understate their profits to govern- 
ments, for tax reasons, and to workers, in order to justify low wages; they 
also often overstate their profits to shareholders, in order to boost their stock 
exchange ratings and their capacity to borrow. 

16 Thomas Michl, "Why is the Rate of Profit still Falling?", Jerome Levy 
Economics Institute, Working Paper 7, September 1988. 

17 Anwar Shaikh and E Ahmet Tonak, Measuring the Wealth of Nations. 

1 8 Ufuk Tutan and Al Campbell, "The Post 1960 Rate of Profit in Germany", 
Working Paper 05/01, Izmir University of Economics, Turkey. 

19 Edwin R Wolf, "What's Behind the Rise in Profitability in the US in the 
1980s and 1990s", Cambridge Journal of Economics 27 (2003), pp479-499. 

20 Piruz Alemi and Duncan K Foley, "The Circuit of Capital, US Manufacturing 
and Non-financial Corporate Business Sectors, 1947- 1993", September 
1997, available at 

21 Gerard Dumenil and Dominique Levy, "The Real and Financial Components 
of Profitability", 2005, pll, available at 

22 Robert Brenner, The Economics of Global Turbulence, p7. 

23 Fred Moseley, "The Rate of Profit and the Future of Capitalism", Review of 
Radical Political Economics (May 1997), available at 

24 Gerard Dumenil and Dominique Levy, "The Real and Financial Components 
of Profitability". 

25 Andrew Glyn and Bob Sutcliffe, British Capitalism, Workers and the Profits 
Squeeze (Harmondsworth, Penguin, 1972). 

26 Bob Rowthorne, "Late Capitalism", New Left Review, 1:98 (1976), p67. 

27 Ernest Mandel, Late Capitalism (London, New Left Books, 1975), pl79. 

28 Martin Wolf, Fixing Global Finance (New Haven, Yale University Press, 
2009) pxii. 



29 For a summary of the evidence, see my book, Explaining the Crisis, pp 123- 124. 

30 Victor Perlo, "The New Propaganda of Declining Profit Shares and 
Inadequate Investment", pp53-64. For a damning recent refutation of the 
view that increased wages were the cause of falling profit rates see Robert 
Brenner, The Economics of Global Turbulence, pl39. 

31 M N Baily, "Productivity and the Services of Capital and Labour", 
Brookings Papers on Economic Activity, 1981:1. 

32 Bank of England Quarterly Bulletin, 1978, p517. 

33 Financial Times, 3 March 1977. 

34 Thomas Michl, "Why Is the Rate of Profit Still Falling?" Colgate University 
Working Paper, 1988. 

35 Edwin Wolff, "What's Behind the Rise in Profitability in the US in the 1980s 
and 1990s?" Cambridge Journal of Economics, 27:4. 

36 Figures for non-residential business capital given in H Patrick and H Rosowski 
(eds), Asia's New Giant (Washington, Brooking Institution, 1976), pi 12. 

37 As above, ppl 1-12 and 55. 

38 As above, p8. 

39 David Halberstam, The Best and the Brightest (London, 1970), p78. 

40 US Department of Commerce figures are given in Joseph Steindl, "Stagnation 
Theory and Policy", Cambridge Journal of Economics, 3 (March 1973). 

41 For a longer discussion on this, see my book, Explaining the Crisis, ppl37-140. 

42 Robert Brenner points repeatedly in The Economics of Global Turbulence to 
the way in which German and Japanese industry was able to be profitable at 
the expense of US industry — although, as we have seen earlier, he does not 
relate this to Marx's account of falling profit rates. 

43 M N Baily, "Productivity and the Services of Capital and Labour". 

44 The argument is Baily's — though he does not, of course, present it in Marxist 
terms as referring to the way concrete labour inside the US has to be evalu- 
ated in terms of abstract labour on a world scale. 

45 For exceptions, see Tony Cliff, Russia: a Marxist Analysis (London, 
International Socialism, 1964); and Chris Harman, "Prospects for the 
Seventies: The Stalinist States", International Socialism, 42 (first series, 1970). 

46 E Germain (Ernest Mandel) Quatrieme International, 14 (1956), 1-3 (my 

47 Ernest Mandel, "The Generalised Recession of the International Capitalist 
Economy", Inprecor, 16- 17 (1975). 

48 See the Report on Draft Guidelines for Economic and Social Development, 
given by the then Soviet prime minister, N Ryzhkov, to the 27th Congress of 
the CPSU, March 1986. 

49 Abel Aganbegyan, Pravda, 5 April 1988. 

50 J Knapp, Lloyds Bank Review, October 1968, p9. Quoted in Chris Harman, 
"Prospects for the Seventies: The Stalinist States". These figures were based on 
official Eastern bloc sources at the time; American estimates showed growth 
rates in the USSR as being between two thirds and three quarters of the Soviet 
estimates, but with the same downward trend. For other estimates and a dis- 
cussion on the different figures, see B Kostinsky and M Belkindas, "Official 
Soviet Gross National Product Accounting", in CIA Directorate of Intelligence, 
Measuring Soviet GNP, Problems and Solutions, Washington, 1990. 

51 Finansy SSSR, 28/69. 

52 Solzhenitsyn's short story For the Good of the Cause provides a graphic sense 
of the frustration and bitterness this caused to those involved in producing. 

53 H Liebenstein, "Allocative Inefficiency v. 'X-Inefficiency'", American 



Economic Review, June 1960. 

54 Robert S Whitesell, "Why Does the USSR Appear to be Allocatively 
Efficient", Soviet Studies, 42:2 (1990), p259. 

55 V Selyunin, Sotsialistischeksaya Industria, 5 January 1988, translated in 
Current Digest of the Soviet Press, 24 February 1988. See also A Zaichenko, 
"How to Divide the Pie", Moscow News 24, 1989. See also the figures from 
Narodnoe Khoziiaistvo SSR, in Mike Haynes, Russia: Class and Power 
1917-2000 (London, Bookmarks, 2002). 

56 Marx, Capital, Volume One, pp648-652. 

57 "An Open Letter to the Party", published in English as Jacek Kuron and 
Karol Modzelewski, A Revolutionary Socialist Manifesto (London, 
International Socialists, nd), p34. 

58 Batara Simatupang, foreword to The Polish Economic Crisis (London, 
Routledge, 1994). 

59 Barana Simatupang, The Polish Economic Crisis, p3. 

60 As I wrote in 1977, bringing together the analyses of Tony Cliff and Kuron and 
Modzelewski, "The Polish crisis is an expression of something much greater. 
The era in which the state could protect national capitalism from the direct 
impact of world crisis is drawing to an end. Discussion on 'state capitalism' 
needs to give way to discussion of the world system of state capitalism... Each 
national state capitalism is more and more sucked into a chaotic, disorganised, 
world system where the only order is that which is provided by the crises and 
destructiveness of the world market itself" — Chris Harman, "Poland: Crisis of 
State Capitalism", International Socialism, 94 (first series, 1977). 

61 Chris Harman, Class Struggles in Eastern Europe, p332. 

62 Report of meeting of USSR Council of Ministers by D Valavoy, Pravda, 19 
September 1988. All reports from the Soviet press are from the monitoring 
service unless indicated otherwise. 

63 Pravda, 6 February 1989. 

64 Soviet TV report of 17 January of a Council of Ministers meeting, BBC 
Monitoring Reports, February 1989. 

65 Moscow News, 25 October 1989. 

66 Izvestia, 22 October 1988. 

67 Pravda, 31 October 1989. 

68 I Adirim, "A Note on the Current Level, Pattern and Trends of 
Unemployment in the USSR", Soviet Studies, 41: 3 (1989). 

69 Trud, 12 January 1989. 

70 Tass, 25 October 1989. 

71 Maddison's figures show Japanese GNP overtaking that of the USSR in 
1987, see maddison/Historical_Statistics/horizontal-file_03-2007.xls 

72 Figures given by Costas Kossis in "Miracle Without End", International 
Socialism, 54 (1992), pll9. 

73 Figures from Angus Maddison, given in Takeshi Nakatani and Peter Skott, 
"Japanese Growth and Stagnation: A Keynesian Perspective", University of 
Massachusetts Working Paper 2006-4, February 2006, available at 

74 World Development Indicators database, World Bank, 1 July 2007. 

75 Costas Kossis, "Miracle Without End". Maddison's figures suggest it was 
just over 40 percent of the US size in 1992. 

76 Stefano Scarpetta, Andrea Bassanini, Dirk Pilat and Paul Schreyer, "Economic 
Growth In The OECD Area: Recent Trends At TheAggregate And Sectoral 
Level", Economics Department Working Papers No 248, OECD/2000. 



77 Figures given by Robert Brenner, The Economics of Global Turbulence, p8. 

78 Figures given by Arthur Alexander, Japan in the Context of Asia (Baltimore, 
Johns Hopkins University, 1998). 

79 Costas Kossis, "Miracle Without End", pi 18. 

80 Arthur Alexander, Japan in the Context of Asia, figure 2. 

81 Productivity in manufacturing, judged to be the most efficient sector of the 
economy, was variously estimated at 75 percent to 80 percent of the US figure. 

82 Rod Stevens, "The High Yen Crisis in Japan", Capital and Class, 34 (1988), 
P 77. 

83 As above, pp76-77. 

84 Karel van Wolferen, "Japan in the Age of Uncertainty", New Left Review, 
1:200 (2003). 

85 Costas Lapavitsas, "Transition and Crisis in the Japanese Financial System: 
An Analytical Overview", Capital & Class, 62 (1997). 

86 Karel van Wolferen, "Japan in the Age of Uncertainty". 

87 Figures given by Gavan McCormack, "Breaking Japan's Iron Triangle", 
New Left Review, 2:13 (2002). 

88 Regrettably, some left wing commentators with a quite justified distaste for 
the Japanese ruling class also imply that if it had been more "Western" in its 
approach to competitiveness, things would have turned out differently. See, 
for example, R Taggart Murphy, "Japan's Economic Crisis", New Left 
Review, 2:1 (2000). 

89 Fumio Hayashi and Edward C Prescott, "The 1990s in Japan: A Lost 
Decade", September 2001, available at: 

90 As above. 

91 Paul Krugman, "Japan's Trap", May 1998, available at 
krugman/www/j aptrap.html 

92 Richard Koo, The Holy Grail of Macroeconomics (Wiley, 2008). 

93 Gavan McCormack, "Breaking the Iron Triangle". 

94 Fumio Hayashi and Edward C Prescott, "The 1990s in Japan: A Lost 

95 For India, see, for instance, Vivek Chibber, Locked in Place (Tulika Books 
and Princeton University Press, 2004), p252; for China, the official figures 
show a halving of the growth rate for 1976-8 compared with the early 1950s 
and the mid-1960s — see Justin Yifu Lin, Fang Cai and Zhou Li, "Pre- 
Reform Economic Development in China", in Ross Garnaut and Yiping 
Huang, Growth Without Miracles (Oxford University Press, 2001), p61. 

96 See graph in World Bank, World Development Report 1991. 

97 A de Janvry, "Social Disarticulation in Latin American History", in K S Kim 
and D F Ruccio, Debt and Development in Latin America (South Bend, 
University of Notre Dame Press, 1986), p49. 

98 D F Ruccio, "When Failure becomes Success: Class and the Debate over 
Stabilisation and Adjustment", World Development, 19:10 (1991), pl320. 

99 A de Janvry, "Social Disarticulation in Latin American History", p67. 

100 K S Kim and D F Ruccio, Debt and Development in Latin America, pi. 

101 A Fishlow, "Revisiting the Great Debt Crisis of 1982", Working Paper 37, 
Kellogg Institute, University of Notre Dame, May 1984, pl06. 

102 IMF, quoted in A Fishlow, "Revisiting the Great Debt Crisis of 1982", pl08. 

103 Figures given in A A Hoffman, Capital Accumulation in Latin America 

104 Report by the Techint group of companies, June 2001 — see http://www 



105 Financial Times, 13 July 1990. 

106 UNCTAD Handbook of Statistics, 2002. 

107 J Stop ford and S Strange, Rival States, Rival Firms, p8. 

108 Figure given in Romilly Greenhill and Ann Pettifor, HIPC: How the Poor are 
Financing the Rich, a report from Jubilee Research at the New Economics 
Foundation (April 2002), available at 

109 "Trade Makes US Strong", 

110 M C Penido and D Magalhaes Prates, "Financial Openness: The Experience 
of Argentina, Brazil and Mexico", CEPAL Review 70 (2000), p61. 

111 As above, p60. 

112 Paula R De Masi, "The Difficult Are of Economic Forecasting", Financing 
and Development, International Monetary Fund, December 1996. See 

113 World Bank figures, see 

Chapter Nine: The Years of Delusion 

1 Ben Bernanke, Speech to the Eastern Economic Association, Washington 
DC, February 20, 2004, available at 

2 Philip Thornton, The Independent, 1 November 1999. 

3 Precis in the US government publication, Monthly Labor Review Online, of 
an article by W Michael Cox and Richard Aim in the 1999 Annual Report of 
the Federal Reserve Bank of Dallas, available at 

4 This is based on my personal recollection of debating with Desai at LSE and 
Minford at Cardiff University at the time. 

5 Financial Times, 11 September 2001. 

6 See, for instance, "US Recession May Have Ended Before It Began", 
Financial Times, 1 March 2002. 

7 World Bank, World Development Indicators. 

8 For further discussion on this, see my response, "Misreadings and 
Misconceptions" to Jim Kincaid, "The World Economy — A Critical 
Comment", in International Socialism, 119 (2008). 

9 Marco Terrones and Roberto Cardarelli, "Global Imbalances, A Saving and 
Investment Perspective", World Economic Outlook, International Monetary 
Fund, 2005, Chapter Two (Fig. 2.1) available at 

10 David Kotz, "Contradictions of Economic Growth in the Neoliberal Era", 
Review of Radical Political Economy, 40:2 (2008). 

11 Fred Moseley, "Is The US Economy Headed For A Hard Landing?", avail- 
able at 

12 Kerry A Mastroianni (ed), The 2006 Bankruptcy Yearbook and Almanac, 
Chapter 11, available from 

13 Joseph Stiglitz, The Roaring Nineties: Why We're Paying the Price for the 
Greediest Decade in History (Harmondsworth, Penguin, 2004). 

14 Gareth Dale, Between State Capitalism and Globalisation (Peter Lang, 
2004), P 327. 

15 R Honohan and D Klingebiel, quoted in Charles Goodhart and Dirk 



Schoenmaker, "Burden Sharing in a Banking Crisis in Europe", available at 

16 See the OECD report on these questions, "Government Policies Towards 
Financial Markets", Paris 1996, available at 
7. doc 

17 Fred Magdoff, "The Explosion of Debt and Speculation", Monthly Review, 
58:6(2006), p5. 

1 8 Stefano Scarpetta, Andrea Bassanini, Dirk Pilat and Paul Schreyer, 
"Economic Growth in the OECD Area: Recent Trends at the Aggregate and 
Sectoral Level", OECD Economics Department Working Papers 248 (2000), 

19 Figures supplied by Robert Brenner at the Historical Materialism 
Conference, London 2007. 

20 Table from Stefano Scarpetta, Andrea Bassanini, Dirk Pilat and Paul 
Schreyer, "Economic Growth in the OECD Area: Recent Trends at the 
Aggregate and Sectoral Level". 

21 As above, p30. 

22 For mainstream economic discussions on the increased rate of depreciation 
due to computerisation, see Stacey Tevlin and Karl Whelan, "Explaining the 
Investment Boom of the 1990s", Journal of Money, Credit and Banking, 35 
(2003); for an earlier discussion on the shortening of the lifetime of fixed 
capital and thus of increasing depreciation rates, see Martin S Feldstein and 
Michael Rothschild, "Towards an Economic Theory of Replacement 
Investment", Econometrica, 42:3 (1974), pp393-424. They suggest "a sig- 
nificant change in the average expected age of new non-farm 
investment... from 19.8 years in 1929 to 15.3 years in 1963." 

23 Total labour compensation, including employers' social security and pension 
contributions and imputed labour income for selfemployed persons. For fig- 
ures, see 

http://ocde.p4.siteinternet.eom/publications/doifiles/8 1200713 1 G25.xls 
.There would seem to be problem with using these figures to compare 
labourshares from country to country, as opposed to over time, since other 
data indicate a much higher share of capital accumulation in Japan than in 
the US and Western Europe. 

24 Chuck Collins, Chris Hartman and Holly Sklar, "Divided Decade: Economic 
Disparity at the Century's Turn", United for a Fair Economy, 15 December 

25 See the graph in G Dumenil and D Levy, Capital Resurgent, p46. 

26 International Labour Organisation figures, available from The figures given by 
various sources vary considerably, depending on how they count parttime 
working and whether they take into account unpaid overtime measurements. 
Other figures, based on reports from firms, show a bigger rise than do the 
ILO figures. 

27 BBC report, 5 September 2005. 

28 Anwar Shaikh, "Who Pays for the 'Welfare' in the Welfare State?" 

29 Table from Duane Swank and Cathie Jo Martin, "Employers and the 
Welfare State", Comparative Political Studies, 34:8 (2001), pp917-918. 

30 Figures from US Department of Labor, Organization for Economic 
Cooperation and Development. There are discrepancies with the ILO figures 



for individual countries, but the same overall pattern between countries. 

31 Productivity per worker in France was only 70 percent of that in the US, but 
productivity per hour worked is 5 percent higher — figures for the year 2000 
from EU, Ameco data base, given in Olivier Blanchard, "European Growth 
over the Coming Decade", September 2003. See 779 

32 Details from Stefan Bornost, in "Germany: The Rise of the Left", 
International Socialism, 108 (2005). 

33 Stephen Broadberry, "The Performance of Manufacturing", in Roderick 
Floud and Paul Johnson, The Cambridge Economic History of Modern 
Britain (Cambridge, 2004), p59; Office of National Statistics, Monthly 
Digest of Statistics, July 2007, Table 7.1.34 For greater detail, see Chris 
Harman, "Where is Capitalism Going: Part Two", International Socialism, 

35 Chen Zhan, editor of The China Analyst, June 1997. 

36 Ching Kwan Lee, "'Made in China': Labor as a Political Force?", University 
of Montana, 2004, available on 

37 For the full story see the issues of the China Daily (Beijing) for the second 
week of August 2005. 

38 C Guidi and W Chuntao, Survey of Chinese Peasants, quoted in Yang Lian, 
"Dark Side of the Chinese Moon", New Left Review, 2:32 (2005), available 
at http : //www. ne wle f tr e vie w. net/NLR2 6606. shtml 

39 South China Post, quoted in M Hart Landsberg and P Burkett, "China and 
the Dynamics of Transnational Accumulation", paper given at conference on 
"The Korean Economy: Marxist Perspectives", Gyeongsang National 
University, Jinju, South Korea, 20 May 2005, p24. 

40 Figure given by Martin Wolf, in Fixing Global Finance (New Haven, Yale 
University Press, 2008), pl65. 

41 Steven Barnett and Ray Brooks, "What's Driving Investment in China?", 
IMF Working Paper 265 (2006), available at 


42 As above. 

43 Jahangir Aziz and Li Cui, "Explaining China's Low Consumption: The 
Neglected Role of Household Income", IMF Working Paper 181 (2007), 
available at wp07181.pdf 

44 As above. 

45 From Jahangir Aziz and Steven Dunaway, "China's Rebalancing Act", 
Finance and Development, IMF, 44:3 (2007) available at 

46 Figure quoted in M Hart Landsberg and P Burkett, "China and the 
Dynamics of Transnational Accumulation", p5. 

47 Quoted by J Kynge, Financial Times, 23 September 2003. 
4 8 Finan cial Times, 4 Fe br uary 2003. 

49 Quoted in Financial Times, 18 November 2003. 

50 Jonathan Anderson, "Solving China's Rebalancing Puzzle", Finance and 
Development, IMF, 44:3 (2007), available at 

http : //www. imf . org/external/p ub s/ ft/ f andd/2 0 0 7/09/ander son. htm 

51 Ray Brooks, "Labour Market Performances", in Eswar Prasad (ed), China's 
Growth and Integration in the World Economy (IMF, 2004). 

52 The "secondary sector" includes construction, water, electricity generation, 



etc, as well as manufacturing. 

53 Steven Barnett and Ray Brooks, "What's Driving Investment in China?" p5. 

54 Phillip Anthony O'Hara, "A Chinese Social Structure of Accumulation for 
Capitalist Long- Wave Upswing?", Review of Radical Political Economics, 
38 (2006), pp397-404. But as with all calculations of profit rates, there can 
be doubts as to the accuracy of the statistics he bases his calculations on — 
particularly since his figures indicate a decline in the rate of exploitation, 
which hardly fits in with the declining proportion of wages and consumption 
in GNP shown in Jahangir Aziz and Li Cui, "Explaining China's Low 
Consumption: The Neglected Role of Household Income". 

55 Figures given in Jesus Felipe, Editha Lavina and Emma Xiaoqin Fan, 
"Diverging Patterns of Profitability, Investment and Growth in China and 
India during 1980-2003", World Development, 36:5 (2008), p748. 

56 Zhang Yu and Zhao Feng, "The Rate of Surplus Value, the Composition of 
Capital, and the Rate of Profit in the Chinese Manufacturing Industry: 1978- 
2005", paper presented at the Second Annual Conference of the 
International Forum on the Comparative Political Economy of 
Globalization, 1-3 September 2006, Renmin University of China, Beijing, 

57 Quoted in J Kynge, Financial Times, 23 September 2003. See also Steven 
Barnett, "Banking Sector Developments", in Eswar Prasad (ed), China's 
Growth and Integration in the World Economy. 

58 Steven Barnett and Ray Brooks, "What's Driving Investment in China?", 

59 Sebastian F Bruck, "China Risks Caution Overkill After Bear Prudence", 
Asia Times, 26 March 2008. 

60 Quoted in Jahangir Aziz and Steven Dunaway, "China's Rebalancing Act". 

61 Thomas Lum and Dick K Nanto, "China's Trade with the United States and 
the World", CRS report to Congress, January 2007, available at http://digi- 

62 China's share of global output was estimated at 10.9 percent, the US's at 
21.4 percent. See Selim Elekdag and Subir Lall, "Global Growth Estimates 
Trimmed After PPP Revisions", IMF Survey Magazine, 8 January 2008. 

63 See Financial Express, 30 April 2004, available at 

64 Petia Topalova, "India: Is the Rising Tide Lifting All Boats?", IMF Working 
Paper, WP/08/54, March 2008, available at 

www. imf . org/ e xter nal/p ub s/ f t/wp/2 008 /wp 0854.pdf 

65 A Banerjee and T Piketty, "Top Indian Incomes, 1922-2000", World Bank 
Economic Review, 19:1, ppl-20, quoted in Petia Topalova, "India: Is the 
Rising Tide Lifting All Boats?" 

66 Abhijit Sen and Himanshu, "Poverty and Inequality in India: Getting Closer 
to the Truth", Ideas, 5 December 2003, available at There 
has been a very long discussion on how to interpret the official figures in var- 
ious articles in the Economic and Political Weekly. 

67 Figure for 1992 from Abhijit Sen, Force, 20 April 2004. 

68 Abhijit Sen, Force, 20 April 2004. 

69 Sukti Dasgupta and Ajit Singh, "Manufacturing, Services and Premature De- 
Industrialisation in Developing Countries," Centre for Business Research, 
University Of Cambridge Working Paper 32 7. 



70 Figures given in Ministry of Labour and Employment, "India, Informal 
Sector In India , Approaches for Social Security". 

71 "Labour Shortage Threat to Indian Call Centre Growth", UNI 2006, 
http ://www. uni- 
entre%2 Ogrowth.pdf 

Chapter Ten: Global Capital in the New Age 

1 WTO Annual Reports, 1998 and 2008. 

2 UNCTAD Investment Brief, Number 1 (2007). 

3 UNCTAD World Investment Report 2008 and International Monetary 
Fund, World Economic Outlook, October 2008, Database: Countries. 

4 Multinational firms (eg ITT, Ford, Coca-Cola) had existed in the prewar 
period. But they were not generally based upon integrated international re- 
search and production. So the British subsidiary of a US car firm would 
generally develop and market its own models independently of what hap- 
pened in Detroit. Insofar as there was international organization of 
production, it was by firms based in the metropolitan countries controlling 
the output of foodstuffs and raw materials in the Third World, as for in- 
stance Unilever or Rio Tinto Zinc did. 

5 Financial Times, Survey: World Banking, 22 May 1986. 

6 A Calderon and R Casilda, "The Spanish Banks Strategy in Latin America", 
CEPAL Review 70, 2000, pp78-79. 

7 As above, p79. 

8 UNCTAD press release, available at 

9 See, for a prime example of how such nonsense could become a fashionable 
commodity just before the last world recession, Charles Leadbetter's much 
hyped book of the late 1990s, Living on Thin Air (Harmondsworth, 
Penguin, 2000). 

1 0 Quoted in the Financial Times, 2 0 June 1988. 

11 Business Week, 14 May 1990. 

12 V Forrester, The Economic Horror (London, Polity, 1999), ppl8-19. 

13 Naomi Klein, No Logo (London, Flamingo, 2000), p223. 

14 John Holloway, "Global Capital and the National State", in Werner 
Bonefeld and John Holloway, Global Capital, National State and the Politics 
of Money (New York, St Martin's Press, 1995), pl25. Holloway does at one 
point recognise that productive capital is less mobile than money capital, but 
then goes on to ignore the effect of this distinction on the relations between 
capitals and states. 

15 Speech to Congress, 6 March 1991. 

16 N Harris, The End of the Third World (Harmondsworth, Penguin, 1987), 

17 Scott Lash and John Urry, The End of Organised Capitalism (London, Polity 
Press, 1987). 

1 8 Suzanne de Brunhoff, "Which Europe Do We Need Now? Which Can We 
Get?" in Riccardo Bellofiore (ed), Global Money, Capital Restructuring, and 
the Changing Patterns of Labour (Cheltenham, Edward Elgar, 1999), p50. 

19 D Bryan, "Global Accumulation and Accounting for National Economic 
Identity", Review of Radical Political Economy, 33 (2001), pp57-77. 

20 Alan M Rugman and Alain Verbeke, "Regional Multinationals and Triad 



Strategy", 2002. See 
C164.pdf. For an important analysis of the "core firms" which have the 
most influence in national economies, see Douglas van den Berghe, Alan 
Muller and Rob van Tulder, Erasmus (Scoreboard of Core Companies 
(Rotterdam, Erasmus, 2001). 

21 Gordon Piatt, "Cross-Border Mergers Show Rising Trend As Global 
Economy Expands", Global Finance, December 2004. 

22 Sydney Finkelstein, "Cross Border Mergers and Acquisitions", Dartmouth 
College, available at 
stein/article s/ Cro ss_Border. pdf 

23 Tim Koechlin, "US Multinational Corporations and the Mobility of 
Productive Capital, A Sceptical View", Review of Radical Political 
Economy, 38:3 (2006), p375. 

24 As above, p376. 

25 As above, p374. 

26 Riccardo Bellofiore, "After Fordism, What? Capitalism at the End of the 
Century: Beyond the Myths", in Global Money, Capital Restructuring and 
the Changing Patterns of Labour (Edward Elgar, 1999), pi 6. 

27 Tim Koechlin, "US Multinational Corporations and the Mobility of 
Productive Capital, A Sceptical View", p374. 

28 W Ruigrok and R van Tulder, The Logic of International Restructuring 
(London, Routledge, 1995). 

29 M Mann, "As the Twentieth Century Ages", New Left Review, 214 (1995), 

30 Mary Amiti and Shang-Jin Wei, "Service Off shoring, Productivity and 
Employment: Evidence from the United States", IMF Working Paper 
WP/05/238, P 20. 

31 Tim Koechlin, "US Multinational Corporations and the Mobility of 
Productive Capital, A Skeptical View", p378. 

32 Martin Neil Baily and Robert Z Lawrence, "What Happened to the Great 
US Job Machine? The Role of Trade and Offshoring", paper prepared for 
the Brookings Panel on Economic Activity, 9-10 September 2004, p3. 

33 Alan M Rugman, The Regional Multinationals (Cambridge, 2005). 

34 Alan M Rugman and Alain Verbeke, "Regional Multinationals and Triad 

35 Michaela Grell, "The Impact of Foreign- Controlled Enterprises in the EU", 
Eurostat 2007, 
07-067/ EN/KS-SF-07-067-EN.PDF 

36 Georgios E Chortareas and Theodore Pelagidis, "Trade Flows: A Facet of 
Regionalism or Globalisation?" in Cambridge Journal of Economics, 28 
(2004), pp253-271. 

37 As above. 

38 Figures from UNCTAD, World Investment Report 2005, Annex, Table B3. 

39 See "Pentagon Takes Initiative In War Against Chip Imports", Financial 
Times, 27 January 1987. 

40 Financial Times, 12 September 1990. 

41 Article reprinted in International Herald Tribune, 17 December 1996. 

42 Robert Brenner, The Economics of Global Turbulence, pp206-207. 

43 For an excellent account of the Argentinian economy in this period, see 
Claudio Katz, "El Giro de la Economfa Argentina", Part One, available at 
http : //www. aporrea . org/ imprime/a3 0832. html 

44 Dick Bryan, "The Internationalisation of Capital", Cambridge Journal of 



Economics, 19 (1995), pp421-440. 

45 Mark E Manyin, South Korea-U.S. Economic Relations: Co-operation, 
Friction, and Future Prospects, CRS Report for Congress, July 2004. See which contains a fascinating list of 
the clashes between the US and South Korean governments as each seeks to 
advance the economic interests of the firms operating from its national terri- 

46 This, essentially, is the argument of William Robinson in The Theory of 
Global Capitalism (Baltimore, Johns Hopkins, 2004). 

47 Marx, Capital, Volume Three, p248. 

48 Henry Kissinger, Diplomacy (New York, Simon & Schuster, 1994), pp809 
and 816. 

49 Weekly Standard, 7 September 1997. 

50 Project for the New American Century, Statement of Principle, 7 June 1997. 

51 Fred Magdoff, "The Explosion of Debt and Speculation", p5. Net physical 
investment by non-farm, non-financial corporate business in the US in 2006 
amounted to $299 billion, the US military budget to $440 billion. 

52 Iraq Study Group Report, 2006, available at 

Chapter Eleven: Financialisation and the Bubbles That Burst 

1 Gideon Rachman, Financial Times, 29 January 2007. 

2 Chris Giles, Financial Times, 5 February 2008. 

3 Nouriel Roubini's Global EconoMonitor, 7 September 2008, available at 

4 Financial Times, 29 January 2009. 

5 Chris Giles, Financial Times, 29 January 2009. 

6 Andrew Glyn, Capitalism Unleashed (Oxford University Press, 2007), p52. 

7 These figures are based on Robert Brenner's calculations. Other estimates, 
for instance by Martin Wolf in the Financial Times (28 January 2009), arrive 
at a figure of 40 percent for the mid-2000s. 

8 Michael Mah-hui Lim, contribution at conference on Minsky and the crisis, 
Levy Institute Report, 18:3 (2008), p6. 

9 Sebastian Barnes and Garry Young, "The Rise in US Household Debt: 
Assessing its Causes and Sustainability", Bank of England Working Paper 
206 (2003), Chart Four, pi 3, available at 
usde btr atio- hi story, pdf 

10 World Bank, Global Development Finance (2005). 

11 Robin Blackburn, Banking On Death, Or Investing In Life (London, Verso, 
2002); Age Shock : How Finance Is Failing Us (London, Verso, 2007). 

12 Andrew Glyn, Capitalism Unleashed, p69. 

13 Martin Wolf, Financial Times, 15 January 2008. 

14 Figures as given in Robert Brenner, The Economics of Global Turbulence, 

15 Named after an Italian American fraudster of the early 1920s. There is an 
early account of such a scheme in Charles Dickens's Martin Chuzzlewit, 
written in 1844-5. 

16 Chris Harman, "Where is Capitalism Going?", International Socialism, 58 

17 Michel Aglietta, "A Comment and Some Tricky Questions", Economy and 
Society, 39 (2000), pl56. The discussion between Aglietta and Boyer was in- 
dicative of a situation where the Regulation School's effort to explain the 



long-term trajectory of capitalism comes adrift. For a comment on it, see 
John Grahl and Paul Teague, "The Regulation School", Economy and 
Society, 39 (2000), ppl69-170. 

1 8 For a full explanation see Dick Bryan and Michael Rafferty, Capitalism with 
Derivatives (Palgrave, 2006), p9. 

19 Thomas Sablowski, "Rethinking the Relation of Industrial and Financial 
Capital", paper given to Historical Materialism conference, December 2006. 

20 "Immeltdown", Economist, 17 April 2008. 

21 Financial Times, 6 September 2001. 

22 As above. 

23 As above. 

24 Financial Times, 15 September 2007. 

25 Speech opening the London HQ in Canary Wharf in 2004. 

26 "Flow of Funds Accounts of the United States, Second Quarter 2007", 
Federal Reserve statistical release, pl06, table R102. See http://www.federal- 

27 Marco Terrones and Roberto Cardarelli, "Global Imbalances: A Saving and 
Investment Perspective", World Economic Outlook, International Monetary 
Fund, 2005, p92. 

28 " Corporate s are Driving the Global Savings Glut", JP Morgan Research, JP 
Morgan Securities Ltd., 24 June 2005. See 
JPMorgan/GlobalSavings_2 4Jun05.pdf 

29 Dimitri Papadimitriou, Anwar Shaikh, Claudio Dos Santos and Gennaro 
Zezza, "How Fragile is the US Economy?", Strategic Analysis, The Levy 
Economics Institute of Bard College, February 2005. 

30 Speech at the Historical Materialism conference, London, November 2007. 

3 1 Finan cial Times, 22 January 2008. 

32 Martin Wolf, Financial Times, 21 August 2007. 

33 Martin Wolf, Financial Times, 22 January 2008. 

34 Marx, Capital, Volume Three, p458. 

35 Adair Turner, "The Financial Crisis and the Future of Financial Regulation", 
The Economist's Inaugural City Lecture, 21 January 2009, available at 

36 Martin Wolf, "A Week Of Living Perilously", Financial Times, 22 
November 2008. 

37 Martin Wolf, Financial Times, 23 November 2008. 

38 Financial Times, 3 February 2009. 

39 Quoted in Financial Times, 7 January 2009. 

40 Financial Times editorial, 16 September 2008. 

41 Quoted on Financial Times website, 29 January 2008. 

42 John Gapper, "Davos and the Spirit of Mutual Misunderstanding", 
Financial Times, 30 January 2009. 

43 I heard him speak at the University of London's School of Oriental and 
African Studies (SOAS) in late January 2008. 

44 Larry Elliot and Dan Atkinson, The Gods that Failed (Bodley Head, 2008) 

45 I shared a platform at a fringe meeting at the National Union of Students 
conference in 2000 with one of its leading figures who criticised me for talk- 
ing of "anticapitalism" on the grounds that neither of us had "an alternative 
to capitalism". 

46 Gerard Dumenil and Dominique Levy, "Costs and Benefits of Neoliberalism: 
A Class Analysis", in Gerald A Epstein, Finan cialisation and the World 



Economy (Edward Elgar, 2005), pl7. 

47 James Crotty, "The Neoliberal Paradox: The Impact of Destructive Product 
Market Competition and 'Modern' Financial Markets on Nonfinancial 
Corporation Performance in the Neoliberal Era", in Gerald A Epstein, 
Financialisation and the World Economy, p86. 

48 Francois Chesnais, La Mondialisation du Capital (Syros, 1997), p289. 

49 As above, p74. The passages from Chesnais are translated by me. 

50 As above, p297. 

51 As above, p304. 

52 Peter Gowan, The Global Gamble (London, Verso, 1999), ppl3-14. 

53 Will Hutton, The State Were In (Jonathan Cape, 1995); William Keegan, 
The Spectre of Capitalism (Radius, 1992). 

54 See, for example, Engelbert Stockhammer, "Financialisation and the 
Slowdown of Accumulation", Cambridge Journal of Economics, 28:5, 
pp719-774; Thomas Sablowski, "Rethinking the Relation of Industrial and 
Financial Capital"; Till van Treeck, Reconsidering the Investment-Profit 
Nexus in Finance- Led Economies: an ARDL-Based Approach, see 
http://ideas.repec.Org/p/imk/wpaper/01-2007.html; Andrew Glyn, 
Capitalism Unleashed (Oxford University Press, 2007), pp55-65. 

55 James Crotty, "The Neoliberal Paradox: The Impact of Destructive Product 
Market Competition" and "Modern Financial Markets on Nonfinancial 
Corporation Performance in the Neoliberal Era", in Gerald A Epstein, 
Financialisation and the World Economy, p91. 

56 He raised the argument at a conference on Finance and Financialisation at 
University of London's SOAS in May 2008 and at the Marxism event in 
London in July 2008. See the paper available at 

57 The one reference by Marx to "secondary exploitation" is when he writes 
that "the working class is swindled" by the moneylender and also by the 
"retail dealer who sells the means of subsistence of the worker" — Marx, 
Capital, Volume Three, p596. 

58 Samantha Ashman made this point forcefully at Lapavitsas's presentation of 
his paper at the SOAS Financialisation conference. He had, she pointed out, 
confused the different levels of abstraction with which Marx had analysed 
capitalism. It should be added that, carried to its logical conclusion, 
Lapavitsas's argument would undermine the central stress in Marxist politi- 
cal economy on exploitation at the point of production, since there are all 
sorts of consumer payments that could be designated as "direct exploita- 
tion" — tax payments, rents for domestic accommodation, the elements in 
shopping bills that go to retailers' and wholesalers' profits, the payments 
made to privately owned public utilities. 

59 Sebastian Barnes and Garry Young, "The Rise in US Household Debt: 
Assessing its Causes and Sustainability", Bank of England Working Paper, 
206, 2003. 

60 Dick Bryan and Michael Rafferty, Capitalism with Derivatives, pp32-33. 

61 Engelbert Stockhammer, "Financialisation and the Slowdown of 
Accumulation", pp719-741. 

62 James Crotty, "The Neoliberal Paradox: The Impact of Destructive Product 
Market Competition and 'Modern' Financial Markets on Nonfinancial 
Corporation Performance in the Neoliberal Era", in Gerald A Epstein, 
Financialisation and the World Economy, p82. 

63 Figure given in Robert Brenner, The Economics of Global Turbulence, p215. 



The figure for Britain was much larger. 

64 Robert Milward, "The Service Economy", in Roderick Floud and Paul 
Johnson, The Cambridge Modern Economic History of Britain, Volume 
Three, p249. 

65 Gerard Dumenil and Dominique Levy, "The Neoliberal Counterrevolution", 
in Alfredo Saad Filho and Deborah Johnston (eds), Neoliberalism, A Critical 
Reader (London, Pluto, 2005), pl3. 

66 Robert Brenner, The Economics of Global Turbulence, pi 86. 

67 Marx, Capital, Volume Three, p504. 

68 The case for this interpretation of the shift is well made by Robert W 
Parenteau, "The Late 1990s" US Bubble: Financialisation in the Extreme", 
in Gerald A Epstein, Financialisation and the World Economy, pi 34. 

69 Makato Itoh and Costas Lapavitsas, Political Economy of Money and 
Finance (London, Macmillan, 1999), p60. They also point out that this is 
clear from Marx's treatment of the issue in Volume Two of Capital, although 
at points in Volume Three he ascribed these functions to different groups of 

70 Thomas Sablowski, "Rethinking the Relation of Industrial and Financial 

71 Interview on Today programme, BBC Radio Four, 23 January 2009. See 784651 9. stm 

72 Michel Husson, "Surfing the Long Wave", Historical Materialism 5 (1999), 
available at 

73 This was the position of Engelbert Stockhammer, in "Financialisation and the 
Slowdown of Accumulation"; reiterated in "Some Stylized Facts on the 
Finance-Dominated Accumulation Regime", in Competition & Change, 12:2 
(2008), ppl 84-202; Dumenil denied the relevance of profitability in conver- 
sation at the SOAS conference on Financialisation in May 2008 and in his 
presentation at the Historical Materialism conference in November 2008. 

74 Gerard Dumenil and Dominique Levy, Capital Resurgent, p201. 

75 Ben Fine, "Debating the New Imperialism", Historical Materialism, 14:4 
(2006), pl45. 

76 Friedman's initial academic fame rested on research that claimed to show 
that too low a money supply had caused the crisis of the early 1930s. He 
turned his conclusions upside down when it came to the crises of the 1970s 
and 1980s, blaming them on too great a money supply. The crisis of 
September-October 2008 led some of his followers to hark back to his origi- 
nal research. 

77 George Soros, Financial Times, 29 January 2009. See also Martin Wolf, 
Financial Times, 27 January 2009. 

78 Bank of England Stability Report, October 2008, quoted in the Guardian, 
28 October 2008. The January 2009 estimate of losses originating in the US 
was $2.2 billion (Financial Times, 29 January 2009). 

79 See charts accompanying Martin Wolf, "To Nationalise or Not to 
Nationalise", Financial Times, 4 March 2009. 

80 See, for example the articles in the Financial Times by Wolfgang Muenchau, 
24 November 2008; Jeffrey Sachs, January 27 2009; Samuel Brittan, 30 
January 2009. 

81 Paul Krugman, "Protectionism and Stimulus", available at http://krugman 

82 Nicolas Veron of the Bruge think tank quoted in Financial Times, 5 
February 2009. 



83 See Gillian Tett and Peter Thai Larsen, "Wary Lenders Add to 
Introspection", Financial Times, 30 January 2009. 

84 Gideon Rachman, "Economics Upstages Diplomatic Drama", Financial 
Times, 30 January 2009. 

85 John Gapper, "Davos and the Spirit of Mutual Misunderstanding". 

86 Peter Temin, "The Great Depression", in S L Engerman & R E Gallman, The 
Cambridge Economic History of the United States, Volume Three, The 
Twentieth Century (Cambridge, 2001), p305. 

87 As above, p306. 

Chapter Twelve: The New Limits of Capital 

1 Charles Dickens, Hard Times (Harmondsworth, Penguin, 1969). 

2 F Engels, The Condition of the Working Class in England, in Marx and 
Engels, Collected Works, Volume 4, p343. 

3 For brief histories of the science, see John W Farley, "The Scientific Case for 
Modern Anthropogenic Global Warming", Monthly Review, July- August 
2008; Jonathan Neale, Stop Global Warming, Change the World (London, 
Bookmarks, 2008), pl7; Spencer Weart, "Timeline: The Discovery of Global 
Warming " , http : //www. aip . org/hi story/climate/timeline . htm 

4 James Hansen and others, "Target Atmospheric CO 2 ", quoted in Minqi Li, 
"Climate Change, Limits to Growth, and the Imperative for Socialism", 
Monthly Review, 60:3 (2008), p52. 

5 George Monbiot, "Environmental Feedback: A Reply to Clive Hamilton", 
New Left Review, 2:45 (1997); See also Jonathan Neale, Stop Global 
Warming, p24. 

6 Summary of conclusions, in Guardian, 30 October 2006. 

7 Jonathan Neale, Stop Global Warming, pi 79. 

8 John Vidal, Guardian, 20 December 2006. 

9 George Monbiot, Guardian, 2 December 2008. 

10 Quoted by John Vidal, Guardian, 20 December 2006. 

11 George Monbiot, Guardian, 8 May 2007. 

12 Clive Hamilton, "Building on Kyoto", New Left Review, 45 (May-June 2007). 

13 Figures from Jonathan Neale, Stop Global Warming, p71. 

14 George Monbiot, "Environmental Feedback: A Reply to Clive Hamilton", 
New Left Review, 45 (May-June 2007). 

15 Stern quoted by John Bellamy Foster, Brett Clark and Richard York in 
"Ecology: The Moment of Truth", Monthly Review, 60:3 (2008), p5. 

16 Fiona Harvey, "Eco-Groups Fear an Opportunity Lost", Financial Times, 14 
March 2009. 

17 Guardian, 1 1 March 2009. 

18 Observer, 15 February 2009. 

19 Marx, Capital, Volume One, Chapter 10, "The Working Day", Part 5, "The 
Struggle for the Working Day", available at 

http ://www. marxists . org/ archi ve/marx/works/1 867-cl/chlO. htm#S 1 

20 As above. 

21 All figures from Jonathan Neale, Stop Global Warming, pp28-29 and 157. 

22 David Adam, "Climate Change Causing Birds to Lay Eggs Early", 
Guardian, 15 August 2008. 

23 For a summary of the various calculations about peak oil, see Energy Watch 
Group, "Crude Oil Supply Outlook", October 2007, EWG-Series No 3/2007. 

24 As above, p44. 

25 As above, pi 8. 



26 John Bellamy Foster, "Peak Oil and Energy Imperialism", Monthly Review, 
60:3 (2008). 

27 Report of the National Energy Policy Group, May 2001, pi 81, available at 

28 John Bellamy Foster, "Peak Oil and Energy Imperialism". 

29 The extent to which the price rise was a result of the approach of peak oil is 
open to debate — some ascribe the rise to this, others to speculation that big 
oil producing nations were keeping oil in the ground so as to raise its price. 
For an argument that it was due to war, political instability, currency rates 
and speculation, see Ismael Hossein-Zadeh, "Is There an Oil Shortage?", 
available at 

30 See, for example, Robert Bailey, "Time to Put the Brakes on Biofuels", 
Guardian, 4 July 2008; Jonathan Neale, Stop Global Warming, pplOl-103. 

31 See, for instance, Javier Bias, "The End of Abundance: Food Panic Brings 
Calls for a Second 'Green Revolution'", Financial Times, 1 June 2008; for an 
apocalyptic view of what is happening, see Dale Allen Pfeiffer, "Eating Fossil 
Fuels", From the Wilderness, 2004, available at www.fromthe 

32 Their arguments on this point were reliant on the findings of the pioneering 
organic chemist Liebig, whose writings both Marx and Engels studied. See 
John Bellamy Foster, Marx's Ecology (New York, Monthly Review Press, 
2000), ppl47-170. 

33 Shelley Feldman, Dev Nathan, Rajeswari Raina and Hong Yang, 
"International Assessment of Agricultural Knowledge, Science and Technology 
for Development. East and South Asia and Pacific: Summary for Decision 
Makers", IAASTD (2008), available at 
docs/ES AP_SDM_220408_Final.pdf 

34 World Bank, "World Development Report 2008: Agriculture for 
Development" (2007), p7, available at 

35 The term is that of the Harriet Friedman — see, for instance, "The Political 
Economy of Food", New Left Review, 2:197 (1993), pp29-57. 

36 Javier Bias, "The End of Abundance: Food Panic Brings Calls for a Second 
'Green Revolution'." 

37 World Bank, 2007, "World Development Report 2008: Agriculture for 
Development", p7, available at 

38 Javier Bias, "The End of Abundance: Food Panic Brings Calls for a Second 
'Green Revolution'." 

39 For a longer analysis of the crisis and its possible implications, see Carlo 
Morelli, "Behind the World Food Crisis", International Socialism, 119 (2008). 

40 Javier Bias, "Warning of 'Food Crunch' with Prices to Rise", Financial 
Times, 26 January 2009. 

41 Report produced by Chatham House, quoted in Financial Times, 26 January 

42 See, for instance, Aditya Chakrabortty, "Secret Report: Biofuel Caused Food 
Crisis", Guardian, 4 June 2008. 

Chapter Thirteen: The Runaway System 
and the Future for Humanity 

1 By Alex Callinicos in the column he writes for Socialist Worker. 

2 Details of the report first appeared in the Observer, 22 February 2004. The 
full report is available on 



Chapter Fourteen: Who Can Overcome? 

1 John H Goldthorpe, David Lockwood, Frank Bechhofer and Jennifer Piatt, 
The Affluent Worker in the Class Structure (Cambridge, 1971), p6. 

2 C Wright Mills, The Causes of World War Three (New York, Simon and 
Schuster, 1958). 

3 Herbert Marcuse, One Dimensional Man (London, Routledge & Kegan 
Paul, 1964). 

4 Ernesto Laclau and Chantal Mouffe, Hegemony and Socialist Strategy: 
Towards a Radical Democratic Politics (London, Verso, 1985), p82. 

5 M Hardt and A Negri, Empire (Cambridge, Harvard, 2001), p53. 

6 D Filmer, "Estimating the World at Work", Background Report for World 
Bank, World Development Report 1995 (Washington DC, 1995), available 
at http : //www. monarch. worldbank. org 

7 See, for example, my calculation for the size of the new middle class in 
Britain, in my article, "The Working Class After the Recession", 
International Socialism, 33 (1986). 

8 UNDP World Development Report 2009, Table 21. Similar figures to those 
of the UNDP are provided in the CIA Year Books. The figures provide a sim- 
ilar geographic distribution of industrial work to Filmer, with over 300 
million industrial workers in the old industrial economies and a similar total 
in the BRIC countries. 

9 "Introduction", in R Baldoz and others, The Critical Study of Work: Labor, 
Technology and Global Production (Philadelphia, Temple University Press, 
2001), p7. 

10 US Federal Reserve figures, available at 

11 US Department of Labour provides UN figures for 2006 available at 
According to World Bank figures the United States accounted for 23.8 per- 
cent of the world's manufacturing output in 2004, and over two decades the 
US share had barely dipped. The annual average since 1982 was 24.6 per- 
cent, while China's share for 2004 was 9 percent and South Korea's 4 
percent. Quoted in the International Herald Tribune, 6 September 2005. 

12 The CIA Year Book provides a figure nearly twice that for the old industrial 
countries alone, no doubt because of a wider definition of what constitutes 
the industrial sector. 

13 Figures given by C H Feinstein, "Structural Change in the Developed 
Countries in the 20th Century", Oxford Review of Economic Policy, 15:4 
(1999), table Al. 

14 RE Rowthorn, "Where are the Advanced Economies Going?", in G M 
Hodgson and others, Capitalism in Evolution (Edward Elgar, 2001), pl27. 

15 As above, pl27. 

16 As above, pl27. 

17 Guardian, 5 June 2002. 

18 Office for National Statistics, Living in Britain 2000, Table 3.14, available at 
http ://www. stati sties . gov. uk 

19 All the figures are from "Employed Persons by Occupation, Sex and Age", 
available at 

20 Manuel Castells, "The Network Society: From Knowledge to Policy", in 



Manuel Castells and Gustavo Cardoso (eds), The Network Society 
(Baltimore, Center for Transatlantic Relations, 2006), p9. 

21 Bill Dunn, Global Restructuring and the Power of Labour (London, 
Palgrave Macmillan, 2004), pi 18. 

22 Kate Bronfenbrenner, "Uneasy Terrain: The Impact of Capital Mobility on 
Workers, Wages, and Union Organising", The ILR Collection, 2001, avail- 
able at Particle 
=1001 &context=reports 

23 Raymond-Pierre Bodin, Wideranging Forms of Work and Employment in 
Europe, International Labour Office report 2001. 

24 As above. 

25 Robert Taylor, "Britain's World of Work: Myths and Realities", ESRC 
Future of Work Programme Seminar Series, 2002, available at 

http ://www. e src. ac. uk/ESR CInf o Centre/Image s/ f o w_publication_3_tcm6 - 

26 These figures are from the Office for National Statistics' Social Trends 2001, 
p88. Kevin Doogan, New Capitalism? The Transformation of Work 
(Cambridge UK, Polity, 2008) provides a similar picture to these figures. 

27 These are very rough calculations, given the problems of counting the 
number of workers in the often massive sectors of national economies. But 
Filmer's figures, those of UNDP and those of the CIA all suggest a pattern 
similar to this. 

28 All figures are for 2005, from UNDP, Human Development Report 2009, 
Table 5. 

29 A failure to see this leads some to vastly exaggerate the growth of the work- 
ing class that has resulted from globalisation and urbanisation. So in a much 
quoted paper, Richard Freeman has written of an "effective doubling of the 
global labour force (that is workers producing for international markets) 
over the past decade and a half, through the entry of Chinese, Indian, 
Russian and other workers into the global economy". This has supposedly 
changed the "global capital/labour ratio by just 55 percent to 60 percent of 
what it otherwise would have been". There is a triple error here. It assumes 
that those labouring in the former USSR, China and India were not doing so 
as part of the world system until the early 1990s, and that their whole work- 
forces are now workers employed by capital. There is, however, a big 
difference between the workforce in its totality and those who are wage 
workers. In 2001 the non-agricultural workforce of the developing and tran- 
sition economies was 1,135 million (figures from Summary of Food and 
Agricultural Statistics, Food and Agriculture Organisation of the United 
Nations, Rome 2003, pl2). But by no means all the non-agricultural work- 
force workers. Self-employment as a proportion of the non- agricultural 
workforce is 32 percent in Asia, 44 percent in Latin America and 48 percent 
in Africa (Women and Men in the Informal Economy, International Labour 
Organization, 2002). And only a proportion of those who seek work as 
wage workers succeed in getting employed in the formal sector in modern in- 
dustry. Most are in very low productivity jobs, often working for firms with 
only a couple of workers. 

30 International Labour Office, African Employment Report 1990 (Addis 
Ababa, 1991), p3. 

31 International Labour Office, Women and Men in the Informal Economy, 2002. 

32 See Chapter Nine for details; see also Ray Brooks, "Labour Market 
Performance and Prospects", in Eswar Prasad (ed) China's Growth and 



Integration in the World Economy (IMF, 2004), p58, Table 8.5. 

33 A mistake made, for instance, by Mike Davis in Planet of Slums (London, 
Verso, 2006). 

34 Figures from PRELAC Newsletter (Santiago, Chile), April 1992, diagram 3. 

35 Paolo Singer, Social Exclusion in Brazil (International Labour Office, 1997), 
Chapter 2, Table 7, available at 

36 Figures in J Unni, "Gender and Informality in Labour Markets in South 
Asia", Economic and P olitical Weekly (Bombay), 30 June 2001, p2367. 

37 Ray Brooks, "Labour Market Performance and Prospects", Eswar Prasad 
(ed), China's Growth and Integration into the World Economy-, for further 
analysis of the Chinese urban workforce, see Martin Hart-Landsberg and 
Paul Burkett, "China, Capitalist Accumulation, and Labor", Monthly 
Review, 59:1 (2007). 

38 UNDP, World Development Report 2009, Table 21. 

39 Marx, Capital, Volume One, p628. 

40 As above, p643. 

41 P Singer, "Social Exclusion in Brazil", International Labour Office, 1997, 
Chapter 2, pl4. 

42 See, for instance, the figures given in J Unni, "Gender and Informality in 
Labour Markets in South Asia", Economic and Political Weekly (Bombay), 
30 June 2001, Tables 19, 20 and 22, pp2375-2376. There are, of course, sit- 
uations in which a sudden demand for labour can only be met from the 
informal sector, leading to wage rates temporarily above those in the formal 
sector. The same phenomenon occurs, for instance, with "lump" labour in 
the building industry in Britain. 

43 For an account by employers of why they employ permanent workers, see H 
Steefkerk, "Thirty Years of Industrial Labour in South Gujarat: Trends and 
Significance", Economic and Political Weekly (Bombay), 30 June 2001, 

44 Paulo Singer, Social Exclusion in Brazil, Chapter 2, table 10. 

45 As above, pi 7. 

46 International Labour Organisation, African Employment Report 1990, p34. 

47 Rajar Majumder, "Wages and Employment in the Liberalised Regime: A 
Study of Indian Manufacturing Sector", 2006, available at 

http : //mpra . ub . unimuenchen. de/4 8 5 1 / 

48 As above. 

49 F Engels, "Letter to Bernstein, 22 August 1889", in Marx and Engels, 
Collected Works, Volume 48 (London, 2001). 

50 Mike Davis, Planet of Slums, p36. 

51 Leo Zeilig and Claire Ceruti, "Slums, Resistance and the African Working 
Class", International Socialism 117 (2008), available at 

52 "Informo de Desarrollo Humano in la Region del Altiplano, La Paz y 
Oruro", PNUD Bolvia, 2003, quoted in Roberto Saenz, "Boliva: Critica del 
Romanticismo Anti-Capitalista", mSocialismo o Barbarie, 16 (2004). My 

53 As above. 

54 Leo Zeilig and Claire Ceruti, "Slums, Resistance and the African Working 

55 From a pamphlet on the strike by two Egyptian activists, Mustafa Bassiouny 
and Omar Said, translated by Anne Alexander in International Socialism, 
118 (2008). 



56 Robin Cohen, Peter C W Gutkind and Phyllis Brazier, Peasants and 
Proletarians: the struggles of Third World workers (New York, Monthly 
Review Press, 1979). 

57 H van Wersch, The Bombay Textile Strike 1982-1983 (OUP, 1992), pp45- 
46; Meena Menon and Neera Adarkar, One Hundred Years One Hundred 
Voices (Kolkata, Seagull Books, 2004). 

58 F Engels, The Peasant Question in France and Germany [1894], in Marx 
and Engels Collected Works, Volume 27, pp486 and 496. 

59 Adam David Morton, "Global Capitalism and the Peasantry in Mexico", 
Journal of Peasant Studies, 34:3-4 (2007), pp441-473. 

60 For criticism of "neo-populism" see, for instance, Terence J Byres, "Neo- 
classical Neo-Populism 25 Years On: Deja Vu and Deja Passe, Towards a 
Critique," Journal of Agrarian Change, 4:1-2 (2004). 

61 See, for instance, Keith Griffin, Azizur Rahman Khan and Amy Ickowitz, 
"Poverty and the Distribution of Land," Journal of Agrarian Change, 2:3 
(July 2002). 

62 Hamza Alavi and Teodor Shanin, Introduction to Karl Kautsky, The 
Agrarian Question, Volume 1 (Zwan, 1988), ppxxxi-xxxii. 

63 Danyu Wang, "Stepping on Two Boats: Urban Strategies of Chinese Peasants 
and Their Children", in International Review of Social History, 45 (2000), 
pi 70. 

64 As above. 

65 S Rodwan and F Lee, Agrarian Change in Egypt (Routledge, 1986). 

66 For an account of recent research on these questions, see Pauline E Peters, 
"Inequality and Social Conflict Over Land in Africa", Journal of Agrarian 
Change, 4:3 (2004). 

67 Hamza Alavi, "Peasants and Revolution", Socialist Register 1965, pp241- 
277, available at pdf 

68 Although even then a degree of consent from quite wide layers of the popu- 
lation was obtained as a result of economic growth. 

69 For an account of the insurgency and an explanation for its failure, see Chris 
Harman, The Fire Last Time (London, Bookmarks, 1998). 




Absolute surplus value: The increase in surplus value that occurs when working 
hours are increased without a parallel increase in pay. 

Abstract labour: What all particular acts of labour have in common under capi- 
talism; is measured in terms of the proportion each constitutes of the total 
socially necessary labour time expended in the economy as a whole. 

Austrian School: Version of bourgeois economics which tends to see economic 
crises as inevitable, but necessary for continued economic growth. Best 
known figures Friedrich August von Hayek and Joseph Schumpeter. 

Autarchy: Attempt to cut an economy off from trade links with the rest of the world. 

Baran, Paul: Marxist theorist who argued that development was only possible in 

Global South through a break with capitalism. Collaborator of Paul Sweezy. 
Bauer, Otto: Austrian Marxist of first third of 20th century who followed a policy 

of trying to reform capitalism. 
Bernstein, Edward: "Revisionist" critic of revolutionary Marxism within German 

socialist movement at beginning of 20th century. 
Bills: Documents issued by banks and other capitalist firms that act as IOUs as 

they grant each other credit. 
Bohm-Bawerk, Eugen von: One of the founders of neoclassical economics, wrote 

best known critique of Marx's work. 
Bortkiewicz, Ladislaus von: Polish economist at beginning of 20th century who 

carried through a serious examination of Marx's work but rejected some of 

its crucial findings. 

Bretton Woods: Venue of the conference that set up the post World War Two 
financial system based on gold and dollars. Name given to that system until 
its collapse in 1971. 

BRICS: Initials standing for Brazil, Russia, India, China and South Africa. 

Bukharin, Nicolai: Bolshevik leader and economist theorist; executed by Stalin in 

Capitals: Term often used to describe economically competing units of capitalist 

system (whether individual owners, firms or states). 
Centralisation of capital: Tendency for capital to pass into fewer and fewer hands 

through takeovers, mergers, etc, so that whole capitalist system is under 

direct control of fewer competing capitals. 
Chicago School: Followers of Milton Friedman and monetarism. 
Circulating capital: see Fixed capital. 

Clark, John Bates: American economist, one of the founders of neoclassical economics. 
Cliff, Tony: Palestinian born Marxist resident in Britain through second half of 
20th century; developed theory of state capitalism and, in a rudimentary 



form, of the permanent arms economy. 
Commercial capital: Investment aimed at making a profit from the buying and selling 

of goods as distinct from their production. Sometimes called merchant's capital. 
Commodity: Something bought and sold on the market. Commodities are com- 
monly called "goods" in English. 
Concentration of capital: Growth in size of the individual competing capitals that 

make up the capitalist system. 
Concrete labour: Refers to the specific characteristics of any act of labour — what 

distinguishes, for example, the labour of a carpenter from that of a bus driver. 
Constant capital: Marx's term for a capitalist's investment in plant, machinery, 

raw material and components (in other words, the means of production), 

denoted by c. 

Corey, Lewis: Also known as Louis Fraina, an early member of the American 
Communist Party who later wrote an important Marxist analysis of the 
slump of the 1930s. 

CPSU: Communist Party of the Soviet Union, ruling party within USSR. Its general 
secretaries — Stalin, Khrushchev, Brezhnev, Andropov, Chernenko and finally 
Gorbachev — ran the state. 

Credit crunch: When buying and lending seizes up in the banking system and the 
wider economy. 

Cultural Revolution: Political turmoil in China in the late 1960s and early 1970s. 

Davos: Swiss ski resort where World Economic Forum of leading industrialists, 
financiers, government ministers and economists takes place each year. 

Dead labour: Term used by Marx to describe commodities made in the past but 
used in production in the present. 

Deficit financing: The method by which a government pays for the excess of ex- 
penditure over receipts from taxation by borrowing. 

Deflation: A fall in prices, normally associated with impact of economic crisis. 

Department One: Section of economy which is involved in turning out equipment 
and materials for further production (called by mainstream economists 
"capital goods"). 

Department Two: Section of economy concerned with turning out goods which 
will be consumed by workers (sometimes called "wage goods"). 

Department Three: Section of economy which turns out goods which will not be 
used as means and materials of production, and which will not be consumed 
by workers either — in other words the section that turns out "luxury goods" 
for consumption by the ruling class, armaments and so on. Sometimes re- 
ferred to as Department 2a. 

Dependency theory: Theory very widespread in 1950s and 1960s which held that 
dependence of Third World economies on advanced economies prevented 
economic development. 

Depreciation of capital: Reduction in the price of plant, machinery and so on 
during their period of operation. This can be due to wear and tear, or to the 
"devaluation" of capital (see below). 

Derivatives: Financial contracts designed to allow investors to insure themselves 
against future changes in prices. Derivatives trading developed as a means of 
speculating on interest or exchange rates, and then into a form of financial 
gambling on changes in markets in general. 

Devaluation of capital: Reduction in the value of plant, equipment and so on as 
technical advance allows a greater amount to be produced with a given 
quantity of labour time. 



Euromoney (Eurodollars): Vast pool of finance, denominated in dollars but held 
outside the US, which grew up in late 1960s and 1970s, beyond the control 
of national governments. 

Eurozone: Currency union of 16 European Union states which have adopted the 
euro as their sole legal tender. It currently consists of Austria, Belgium, 
Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, 
Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. 

Exchange value: Term used by Smith, Ricardo and Marx for worth of commodities 
in terms of other commodities. See Value and Use value. 

Expenses of production: Spending which capitals have to undertake to stay in 
business, but which does not materially expand the output of commodities 
(for instance, spending on marketing goods, advertising, protecting plant 
and machinery). 

Fiat money: Form of money that has no intrinsic value apart from a guarantee 
from a government, eg tokens such as notes and coins made of cheap metal. 
Stands in contrast to monetary medium made of or exchangeable for mater- 
ial with value in its own right, such as gold or silver. 

Fictitious capital: Things like shares and real estate investments that are not part 
of the process of production but which provide the owners with an income 
out of surplus value. 

FDI: Foreign Direct Investment, investment by a firm in one country which gives 
it more than 10 per cent of ownership of a firm in another country. 
Investment that does not give that level of ownership or control is called 
portfolio investment. 

Finance capital: Capital in the financial as opposed to productive and sales sectors 
of the economy. Often used to imply that financiers are the real power in the 
economy as a whole. 

Financialisation: Growth of the financial section of the economy and its influence. 
Often the term implies this is detrimental to capital in other sectors. 

Fiscal measures: Tax and spending undertaken by governments. 

Fischer, Irving: Leading neoclassical economist in US in first third of 20th century. 

Fixed capital: Capital invested in plant and equipment which last for several 

cycles of production. Contrasts with circulating capital, which is invested in 
things that are used up in each cycle of production and have to be replaced 
for the next one, ie raw materials, components and labour power. 

Fordism: Term sometimes used to describe capitalism from 1920 to mid-1970s. 
Implies supposed cooperation between firms in mass production industries 
with unions to keep up wage rates. 

Formal sector: Jobs in which workers have legal employment rights. 

Friedman, Milton: Conservative free market economists who believed state could 
stop crises by correct control of money supply. Inspired "monetarist" poli- 
cies of Margaret Thatcher in early 1980s. 

Galbraith, John Kenneth: American economist of the post-war decades critical of 
unrestrained free markets. 

GDP: Gross Domestic Product, measure of the market value of all final goods and 
services made withinthe borders of a nation over a year. 

GNP: Gross National Product, as GDP but also includes the net income from 
overseas investment. 

Gold standard: System under which states tied the value of their national curren- 
cies to quantities of gold and paid off debts to each other with it. States 



broke with it during World War One and from the early 1930s to the end of 
World War Two. Operated in modified form under post- 1945 Bretton 
Woods system that collapsed in 1971. 
Golden Age: Term sometimes used for long boom in the decades following the 
Second World War. 

Great Depression: Term used for period of crises in the 1870s and 1880s, and 

again for slump of the 1930s. 
Grossman, Henryk: Polish- Austrian Marxist activist and economist of first half of 

twentieth century. 

Hansen, Alvin: One of leading mainstream US economists of middle third of 20th 
century, converted to Keynesianism by crisis of 1930s. 

Hayek, Friedrich August von: Conservative economist who opposed attempts of 
state to mitigate impact of economic crises, claiming this could only make 
things worse. Admired by Margaret Thatcher. 

Hilferding, Rudolf: Published pioneering work on impact of finance and monop- 
oly on capitalism, but later served as finance minister in Weimar Republic 
and opposed revolutionary socialism. 

Hobson, J A: British liberal economist of beginning of 20th century, argued that 
imperialism suited finance but not the rest of capitalism. 

Human capital: Term used by mainstream economists to describe the skills em- 
ployees gain from education and training. 

ILO: International Labour Organisation, a United Nations agency dealing with 
labour issues. 

IMF: International Monetary Fund, international body dominated by old indus- 
trial countries (particularly the US) which, along with the World Bank, lends 
money to countries in economic difficulties in return for them accepting tight 
controls over their policies. 

Import substitutionism: Attempt to speed up industrialisation by blocking imports 
and providing protected market for local capitalists. 

Informal sector: Jobs where workers do not have formal employment rights. 

Jevons, William Stanley: British economist of 1860s- 70s, a founder of neoclassical 

Kautsky, Karl: Most prominent Marxist at beginning of 20th century, later opposed 

revolutionary approach. 
Keynesianism: Economic doctrine based upon ideas of the British economist of the 

inter-war years, J M Keynes. Holds that governments can prevent recessions 

and slumps by spending which is greater than their income from taxation 

(so-called "deficit financing"). 
Kidron, Mike: Marxist economist resident in Britain in second half of 20th century 

who further developed theory of permanent arms economy out of ideas of 

T N Vance and Tony Cliff. 

Labour power: Capacity to work, which is bought by capitalists by the hour, day, 

week or month when they employ workers. 
Labour theory of value: View developed by Marx (on basis of ideas of previous 

thinkers such as Smith and Ricardo) that there is an objective measurement of 

the value of goods, which is ultimately responsible for determining their prices. 

This is the "socially necessary" labour time needed to produce them — in other 



words, that across the system as a whole, using the prevailing level of tech- 
nique, skill and effort. For Marx's own accounts of the theory, see Wage 
Labour and Capital, The Critique of Political Economy and chapter one of 
Capital, Volume One. 

Leverage: Borrowing to magnify the buying power of small cash payments for 
shares, property and other assets. 

Liquidity: Having cash in hand (or assets that can be easily turned into cash) to 
meet claims that fall due or, in the case of a bank, meet withdrawal requests. 

Luxemburg, Rosa: Polish-German Marxist, leader of revolutionary opposition in 
Germany to First World War, murdered by counter- revolutionaries in 
January 1919. 

Macroeconomic: Referring to economy as whole, as opposed to "microeconomic" 
relations between individual elements within it. "Macroeconomics" is a branch 
of mainstream economics concerned with trying to guide national economies. 

Marginalism: Another name for neoclassical economics. 

Marshall, Alfred: British economist of late 19th and early 20th centuries and a 
key figure in neoclassical economics. 

Menger, Carl: Austrian economist, one of the founders of neoclassical economics. 

Mercantile or merchant capital: Investment aimed at making a profit without en- 
gaging in production, for instance in the buying and selling of goods. 

Mercosur: A regional trade agreement between some Southern American states 
(Argentina, Brazil, Paraguay and Uruguay). 

Microeconomic: see macroeconomic. 

"Military Keynesianism": Term used for economic impact of rising military ex- 
penditure paid for out of government debt during Ronald Reagan presidency 
in 1980s US. 

Minsky, Hyman: Non-orthodox mainstream economist of mid-2 0th century who 
recognised inevitability of speculative booms and busts for capitalism. 

MITI: Ministry of Internation Trade and Industry, powerful Japanese government 

Monetarism: Doctrine which holds crises cannot be solved by governments in- 
creasing their spending to more than their tax income. Increasing the supply 
of money, this holds, will simply lead to higher prices. Under the name the 
quantity theory of money, this was the orthodoxy in bourgeois economics 
before the rise of Keynesianism in the 1930s, and became fashionable again 
in the mid-1970s. 

"Monetary measures": Attempt to regulate economy, preventing inflation and 

countering recessions by government contraction or expansion of amount of 

money that is circulating. 
Money capital: Money held with the intention of increasing its value, either as 

part of the process of productive investment, or through lending to others. 
Moral depreciation of capital: Loss of value of plant and capitals as it becomes 

obsolescent in the face of rapid technological advance. 

NAIRU: Non- Accelerating Inflation Rate of Unemployment, see Natural Rate of 

Natural Rate of Unemployment: Level which free market economists decided was 
necessary for capitalism to avoid accelerating inflation. Also called 
NAIRU — Non- Accelerating Inflation Rate of Unemployment. 

Neoclassical economics: Dominant school in bourgeois economics since the end of 
the 19th century. Believes value depends on the "marginal" satisfaction people 



get from goods, and justifies profit as a result of the "marginal productivity of 
capital". Also known as "marginalism". 

Neoliberal: "Liberal" is term used in continental Europe meaning "free market", 
so neoliberal means a return to free market economic measures. Used by 
some people on left to refer to attacks on workers' conditions and welfare 
benefits. Also sometimes used to describe period from mid-1970s to present. 

"New Classical" School: School of free market economics which developed in 
1980s; holds that a market economy will stay in equilibrium unless subject 
to external forces or interference by state, monopolies or trade union action. 

NICs: Newly Industrialising Countries of 1960 to 1980s, like South Korea, 
Brazil, Taiwan. 

Nomenklaturists: Those holding high up, privileged positions in state and indus- 
try in old Eastern Bloc countries before 1989-91. 

Non-productive consumption: The use of goods in ways which serve neither to 
produce new plant, machinery, raw materials and so on ("means of produc- 
tion") nor to provide for the consumption needs of workers. The use of 
goods for the consumption of the ruling class, for advertising and marketing 
or for arms, all fall into this category. 

Non-productiveexpenditures: Expenditures undertaken by capitalists or the state 
over and above what is necessary for the production of commodities (in- 
cludes spending on consumption of the ruling class, on its personal servants, 
on the '"expenses of production" and so on). 

OECD: Organisation of Economic Cooperation and Development. Organisation 
of the established industrialised countries with an important research arm. 

Oil shock: Sudden increase in price of oil, especially as a result of the Arab-Israel 
war of October 1973. 

Okishio's theorem: Theory which claims to disprove Marx's tendency of the rate 
of profit to fall. 

OPEC: Organization of the Petroleum Exporting Countries, a cartel currently made 
up of twelve countries: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, 
Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. 

Organic composition of capital: Ratio of the value of investment in plant, ma- 
chinery, raw materials and so on ("means of production") to the value of 
expenditure on employing productive labour. Using Marxist terminology, 
this is the ratio of constant capital to variable capital, or c/v. See also 
Technical composition of capital. 

Organised sector: Term used in India for formal sector, ie where workers have 
legal working rights. 

Pareto, Vilfredo: Italian neoclassical economist at turn of the 20th century, who 

supported Mussolini's rise to power. 
Plaza Accord: 1985 Agreement by Japan and Germany to allow the value of their 

currencies to rise so as make it easier for the US to export. 
Ponzi scheme: A fraudulent scheme which pays profits to old investors out of 

money collected from new investors. 
Preobrazhensky, Evgeny: Russian Bolshevik activist and economist, executed by 

Stalin in 1937. 

Private equity funds: Investment vehicle where rich individuals come together to 

buy shares in companies in order to make a profit. 
Productive expenditures: Spending which is necessary if commodities are to be 

produced and surplus value created (spending on the means and materials of 



production on the one hand, and on workers' wages on the other). 
Productive labour: Labour which contributes to the creation of surplus value. 
Profits, mass of: Total profits of a particular capitalist. Measured in pounds, dollars 

and other currency. 

Profit, rate of: Ratio of surplus value to capital invested. Measured as a percent- 
age. Denoted as s/(c+v). 

Profit share: Proportion of total output of a firm or country that goes in profits, as 
opposed to wages. 

Rate of exploitation: Ratio of surplus value to wages (strictly speaking only the 
wages of workers who produce commodities should be counted). It can be 
expressed another way, as the ratio of the time the worker spends producing 
surplus value for the capitalist, compared to the time he or she spends on pro- 
ducing goods equivalent to his or her living standard. Also called rate of surplus 
value, that is, the ratio of surplus value to variable capital, and depicted as s/v. 

Realisation: Term used by Marx to describe the successful sale of produced com- 
modities so as to achieve a profit. 

"Regulation" theorists: French school of economists influenced by Marxism who 
periodise 20th century capitalism into Fordist and post-Fordist phases. 

Relative surplus value: Increase in surplus value obtained when time it takes for 
workers to produce the equivalent of their own wage is reduced, so causing a 
greater portion of their working time to go to the capitalist. 

Rentier: Old fashioned term describing someone who lives off unearned income 
such as rent or dividends. 

Reserve army of labour: Pool of unemployed workers used by capital to keep 

down the wages of those with jobs and who are able to be drawn into indus- 
try with the periodic expansion of production. 

Ricardo, David: Political economist of first decades of 19th century, developed 
labour theory of value and an important influence on Marx's ideas. 

Robinson, Joan: Radical Keynesian economist of middle third of 20th century, 
broke with neoclassical school but rejected Marx's theory of value. 

Samuelson, Paul: Major populariser of the mainstream synthesis of neoclassical 
and Keynesian ideas through his economic textbook in post-war decades, 
and adviser to the Kennedy government in the US. 

Say's law: Supposed law that holds there cannot be any general overproduction of 
goods because each time someone sells something someone else buys it. 

Schumpeter, Joseph: Austrian economist of first half of 20th century. Supported 
capitalism but rejected idea that it developed smoothly, coined phrase "cre- 
ative destruction". 

Smith, Adam: Most important political economist of latter part of 18th century. 

Distorted presentations of his ideas now constitute apologies for capitalism, 

but a critical use of many of his concepts was important to Marx. 
Socially necessary labour time: Labour time needed to produce a certain good, 

using average techniques prevailing throughout economy and working at 

average intensity of effort. Determines the amount of abstract labour — and 

therefore value — embodied in a commodity. 
Social wage: Term used to describe welfare, health and other benefits supplied 

through the state which improve workers' living standards. 
Solvency: Ability of firms or individuals to pay off all debts providing they have 

time to turn their own assets into cash. 
Sraffa, Piero: Cambridge economist who refuted basic contentions of orthodox 



bourgeois economics, the "neoclassical" marginalist school. His followers 
tend to base themselves on Ricardo rather than Marx and reject the Marxist 
theory of the falling rate of profit, and usually see crisis as arising when 
wages cut into profits. They are often known as "neo-Ricardians", although 
Sraffa regarded himself as in the Marxist tradition. 

Strachey, John: Best known purveyor of Marxist interpretations of slump of 
1930s in Britain, Labour Party minister in the late 1940s and Keynesian 
apologist for right wing Labour ideas in 1950s. 

Surplus value: Marx's term for excess value produced by the exploitation of 
workers. It forms the basis for the profit of the individual capitalist plus 
what he pays out to others in the form of rent, interest payments and taxa- 
tion (plus what he spends on "non-productive activities"). Denoted by s. 

Sweezy, Paul: American economist who wrote a pathbreaking account of develop- 
ment of Marxist ideas in 1940s (The Theory of Capitalist Development) 
and, with Baran, an account of mid 20th century capitalism in 1960s 
(Monopoly Capital). 

Tariffs: Taxes on imports, designed to raise their price and so make it easier for 

local producers to dominate markets. 
Taylorism: Technique of so-called "scientific management", based upon time and 

motion studies of every act of labour. Spread through industry in the early 

20th century. 

Technical composition of capital: Physical ratio of plant, machinery, raw materi- 
als and so on ("means and materials of production") to total labour 
employed. When this ratio is measured in value terms rather than physical 
terms, it becomes the "organic composition of capital". 

Terms of trade: The relative prices of a country's exports to imports. An improve- 
ment to the terms of trade means a country has to pay less for the products it 

Tigers: Term used for East and South East Asian industrialising economies. 
Transformation problem: Problem which arises when the attempt is made to 

move from Marx's account of capitalism in terms of value to the prices at 

which goods are actually bought and sold. Many economists have claimed it 

is impossible to solve the problem, and that therefore Marxist economics 

must be abandoned. 
Triad: The three major parts of the industrialised capitalist world, ie North 

America, Europe and Japan. 
Trusts: Associations of industrial concerns which collaborate to carve up markets 

and force up selling prices. 
Turnover time of capital: Time taken from beginning of production process to 

final sale of goods. 

UNCTAD: United Nations Conference on Trade and Development, a develop- 
ment agency and important source of economic statistics. 

Under-consumptionism: Theory which blames capitalist crisis not on the law of 
the falling rate of profit, but on the alleged inability of capitalism to provide 
a market for all goods produced within it. The first versions of the theory 
were put forward by early 19th century economists such as Jean Charles 
Leonard de Sismondi, but it has been developed since both by Marxists 
(from Rosa Luxemburg to Paul Baran and Paul Sweezy) and by Keynesians. 

Use value: Immediate useful qualities of a commodity. See Exchange Value. 



Valorisation: Term used in some translations of Marx's capital for the self-expansion 
of capital, based on the French translation of the German word Verwertung. 

Value: Amount of abstract labour contained in a commodity; determines its ex- 
change value and, after some redistribution of surplus value between 
capitalists, its price. See Exchange Value. 

Value composition of capital: Ratio of constant to variable capital, differs from 
organic composition by taking into account changes due to other factors as 
well as change in technical composition. 

Vance, T N: American economist who developed theory of "permanent war 
economy" in 1940s and 1950s. 

Variable capital: Marx's term for capital invested in employing wage labour. 
Denoted by v. 

Volcker, Paul: Head of US Federal Reserve in the late 1970s and 1980s. 
Volcker shock or Coup: Sudden increase in US interest rates in 1979. 

Walras, Leon: French economist of latter part of 19th century; a founder of neo- 
classical economics. 
World Bank: See International Monetary Fund. 

WTO: World Trade Organisation, international agency that aims to promote free 

trade and neoliberal agenda. 
World Bank: See International Monetary Fund. 

WTO: World Trade Organisation, international agency that aims to promote free 
trade and neoliberal agenda. 




1834 Poor Law 134 

1968, role of migrant workers in 173; 

1968-75 wave of industrial 

struggles 331 

Abalkin, on Soviet strikes 209 

Absolute surplus value 33, 73 

Abstract labour 26 

Abstraction in three volumes of 
Capital 87 

Accumulation and competition 35-6, 
58, 85, 99, 116; and exploitation 
37; and crisis 58, 60, 62, 101, 204, 
217; and rate of profit 37-39, 69- 
72, 77-78; for the sake of 
accumulation 36, 84; never ending 
52; and class 107, 113-115; and 
logic of state 1 12-117; and USSR 
158; and crisis in USSR 204; in 
China in early 2000s 245-6; and 
consumption in China in early 
2000s 246 (graph 247); and crises 
of Eastern bloc 179; and corruption 
and repression 222; structures of 
and energy use 316 see also Capital 

Accumulation of Capital, The (Rosa 
Luxemburg) 99 

Advertising, as unproductive 121; 
expenditure, US in 1920s 147 

Afghanistan, US occupation 
of 273, 327 

Africa, loss of markets to China 222; 
growing Chinese influence in 274; 
rivalry between French and US 
interests 270; fall in real 
wages 340-1 

"African socialism", disappointment 
with 218 

"After Japan" 211 

Aganbegyan, Abel, on stagnation in 

Soviet economy 203 
Agenda 2010 Programme in 

Germany 240 
Aglietta, Michael see Boyer, Robert 
Agribusiness and agricultural 

technological advance 321 
Agricultural accumulation, structure 

of 321 

Agricultural capitalists 347 
Agriculture, movement of workforce 

to towns, during long boom 173; 

investment, 322; declining growth 

of output 321 
Alavi, Hamza, role played by middle 

peasants in peasant movements 

348; with Teodor Shanin, on ways 

peasantry are integrated into 

capitalism 347 
Alfa 221 
Algeria 185 

Alienated labour, system of 328 

Alienation 13, 14,28, 83 

Alvater, Elmer, on German state and 

economy in long boom 170 
American Free Trade Area 221 
Amnesia of mainstream economic 

commentators 253 
Andropov, Yuri, experience of East 

European crises and role in 

appointing Gorbachev 207 
Angell, Norman, on capitalism's drive 

for peace 92 
"Anglo-Saxon capitalism" 229, 294 
Angola 185 

Arab-Israeli War of 1967 184; of 
October 1973 184, 191 

Argentina 188, 351; industrial 
development before First World, 
187; industrial growth in 1950s 


and 1960s; compared with Italy 
188; economic and political crises 
of 1970s 218; crisis of 2001-2 224 

Arms expenditure, US during long 
boom 198; variations between 
states during long boom 198; in 
1990s and early 2000s 234; China 
2009 327; Russia 2009 327; US 
2009 327; US 2009 327; and 
dynamic of system 131; effect on 
organic composition of capital 234 

Arrow, Kenneth, on limits of 

mathematical model of market 43 

Asian crisis of 1997-8 9, 242; panic 
among commentators 230; role of 
IMF in helping Ford and GM 
acquire Korean firms 266 

Asian Tigers, growth as fast as Stalin's 
USSR 218 see also Asian crisis 

Atkinson, Dan 1 63 see also Elliot, 

August 2007 credit crunch 8 
Austrian school 194; and slump 145; 
and restructuring through crises 
232 see also Hayek, Friedrich 
August von; Schumpeter, Joseph 
Autonomy of state 110-112 

Bail outs, in 1980s and 1990s 233; 

Chrysler 1979 233; 2008-9 

Baker, James 274 

Baldoz, Koeber and Kraft, quoted 332 
Balkan Wars of 1990s, role of different 

imperialist interests in 270 
Banks, role in capitalist production 63- 

4, 87; failures in US in 1931 149; 

nationalisations in Japan, 

Scandinavia, in 1990s 234; Spanish 

and French in Latin America 240; 

crash of September-October 2008 

277-8 290; estimates of losses in 

2008 300 

Bank of International Settlements 7; on 

failure of economic forecasts 9 
Banking capital 63 
Banking crises, before 2003, costs to 
governments of bail outs 234; see 
also Credit crunch 
Banking mergers, international 255 
Bankruptcies and crises 67, 76 
Bankruptcy Year Book, quoted on 

increased frequency of 

bankruptcies 233 
Baran, Paul 165, 190, 218; version of 

dependency theory, quoted 186-7; 

misinterprets Lenin on economic 

development 187 
Bauer, Otto 77; claimed refutation of 

Rosa Luxemburg 100 
Bear Stearns bank, taken over by 

Morgan Chase 277 
Bellofiore, Riccardo, on Foreign Direct 

Investment 261; on "privatised 

Keynesianism" 288 
Bermuda 22 1 

Bernanke, Ben, on lack of an 

explanation for Great Depression 

9,145; on decline in economic 

volatility 229 
Bernstein, Edward, revisionist 

arguments of 89 
Bernstein, Michael, quoted 146 
Bevan, Aneurin 135 
Bhopal disaster 308 
Biofuels and food shortages 322 
Bismarck, Otto von, provides pension 

88; nationalisation of railways 115 
Blackburn, Robin, on pension 

funds 280 
Blair, Tony, and climate change 310 
Bleaney, Michael 165, on 

Keynesianism and long boom 164 
Blind Shaft, Chinese film about 

miners 245 
Boeing/McDonnell Douglas merger, 

role of state in facilitating 265 
Boer War, and panic over fitness of 

working class 134 
Bohm-Bawerk, Eugen von 41, 50, 51, 

67; critique of Marx on value and 

price 48 

Boom, of 1920s, and contradictions 
within 144, 146; short-lived of mid 
to late 1980s 194; of 1980s 283; of 
1990s 283 
see also Long boom 

Boyer, Robert 296; quoted (with 

Aglietta, Michael) on asset bubbles 
and US boom of 1990s 283 

Braunmuhl, Claudia von 104-5; on the 
state and world market 104 

Brazil 218, 221; growth in 1970s 188; 
in period 1965-80 219; "miracle" 



of the 1960s and 1970s 253; 
export-oriented development 219 

Brenner, Neil, on role of states in 
accumulation 108 

Brenner, Robert 71, 105; on Volker 
and failure of Keynesianism 296; 
on Japanese and German 
economies 170-1; critique of 
"Fordism" notion 64; rejects 
Marx's theory on falling rate of 
profit 69, 360; figures for rate of 
profit,195, 196,235 

"Bretton Woods" system 198 

Brezhnev, Leonid, on competitive 
pressures on Soviet economy 203 

BRICS 231, 327; as a disparate 
collection of very different 
economies 253; after Asian crisis 
282; and WTO trade negotiations 
274, 327 

Britain, leaves gold standard 1931, 149; 
during long boom 170, 198; 
unemployment in 1950s 172; 
inflation early 1980s 193; 
restructuring in 1980s 210-11; 
industrial output 1984 193; 
manufacturing output 1970s-2000s 
241; proportion of manual workers 
334; share of new investment in 
financial industry 295 

Brittan, Samuel, from Keynesianism to 
monetarism and back again 194; 
on future of capitalism lying in East 
Asia 241; on falling capital-output 
ratio in 1960s and 1970s 197 

Bronfenbrenner, Kate, on threats to 
move production used to 
demoralise workers 336 

Brown, Gordon 230; on 

"contribution" of Lehman Brothers 
287; blames irresponsible financial 
practices for crisis 298-9 

Bryan, Dick, national dimension to 
global accumulation 266; on 
exchange rate and distribution of 
surplus value 266; quoted on 
national dimension to finance 259; 
(with Michael Rafferty) critique of 
share holder value theories, 295 

Bubble economy, Japanese of 1980s, 

Bubbles of 1970s, 1980s, 1990s and 

early 2000s 278-9 
Budget deficits 200, 216; with end of 

long boom 191 

Bukharin, Nicolai 77, 89,165; critique 
of neoclassical economics 44; 
refutation of Rosa Luxemburg 1 00- 
101; theory of imperialism 95-96; 
compared with Lenin's theory 98- 
99; lack of explanation of why 
imperialism could end first Great 
Depression 101; relevance to 
understanding Cold War 1 82 

Bundesbank 240 

Bureaucracy, class goal of 206 

Bush, George H. W, on New World 
Order 258 

Business cycle 56 see also Crises 

Business Cycles in Yugoslavia 178 

Business Week, on "stateless 
corporation" 257 

Cadbury-Schweppes rationalisation of 

global operations 259 
Call centre employment, in India 252 
Callaghan, James, turns against 

Keynesian methods 193 
Cambridge critique of neoclassical 

economics 10, 44 
Cambridge Economic Policy 

Review 192 
Capitalist agriculture, and peasant 

farmers 321, 348; and soil nutrients 

320; and Green Revolution 321 
Capital accumulation, "essentially 

national" 260; and climate change 

308-314; global, kaleidoscopic 

pattern in 21st century 264; 

new centres of capital 

accumulation 186 
Capital (Marx), different levels of 

abstraction in three volumes 14, 87; 

first chapter 21; Volume Two on 

interrelation between consumption 

and accumulation 99 
Capital exports, and imperialism 98; 

and economic development, Lenin's 

view 187; low level during long 

boom 183; see also Foreign Direct 

Capital growth, greater in Japan and 

Germany than in US during long 



boom 198 
Capital intensive forms of production 

see Organic composition of capital 
Capital, as a relation, not just a thing 32; 

constant 38; variable 38; self 

expansion of 37; different forms 

61-2, 107 
Capitalism, preconditions for 40; as a 

totalising system 85; global 

dynamic of 84; becomes global 

system 30 
Capitalists, as embodiment of the self 

expansion of value 113; alliances 

between 109; as "hostile 

brothers" 268 
Capitalist state, origins 105-107 
Capital-output ratio, Britain 1875- 

1901 102; in 1970s 197; for US in 

post war decades 371 
Capitals and states 102-110, 325 
Capitals in 21st century, different 

accumulation strategies 263-4 
Carchedi, Guglielmo 121; on 

transformation of values into prices 

50; on skilled and unskilled labour 

and value 52-3; on productive and 

unproductive labour 127 
Carnegie, Andrew quoted on Great 

Depression 88 
Cartels 89 

Castells, Manuel, on supposed 

"structural instability" of labour 
markets 335 

Casualisation 342; casual employment, 
not new to capitalism 341 

Cheney, Dick 319 

Chernobyl 308 

Chesnais, Francois 293, 296 

Chicago School of economists 192; see 
also Monetarism 

Children, chronic malnutrition in 
India 252 

Chile 221; growth 1977-80 219 

China, as semi-colony before First 
World War 185; under Mao 115, 
118; economic growth 188; 
peasants 188; primitive 
accumulation 243; state capitalism 
243; Cultural revolution 243; 
stagnation in 1970s 218; new 
model of accumulation after 1970s 
243-5; economic growth 1978- 

2008 242; foreign trade growth 
1979-2007 242; overseas capitalist 
interests 244; growth in 1980s 244; 
fall in manufacturing employment 
from late 1990s 248; informal 
employment 339; rural workforce 
243, 245; apparent fall in peasant 
incomes 245; poverty in early 
2000s 245; excess of saving over 
investment 246, 282; imports from 
Japan and East Asia 217, 247; 
share of consumption in output 
(graph) 246; level of investment 
early 2000s 245; real estate bubble 
249; unemployment 7; and global 
inflation of 2007-8 247; growing 
influence in Africa and Latin 
America 250, 274; share of global 
output of manufacturing goods 
242-3; multinationals and exports 
247; proportion of global buying 
power 250; interdependence with 
US 246-7, 250; and US debt 250, 
281; challenge to US hegemony 271 

Chortareas, Georgios, and Pelagidis, 
Theodore, on regional, not global, 
economic integration 263 

Christian Democrats, ideology 1 64 

Chrysler, bankruptcy 290 

Circuits of capital 62 

Clark, John Bates 42 

Clark, Kenneth, on "irrelevance" of 
nationality of companies 257 

Class, Marx's definition of 112-113; in 
itself and for itself 332, 349; 
character of the state 
bureaucracy 112 

Class compromise theories of long 
boom 163, 172 

Clearances 39 

Cliff, Tony, on military competition 117; 
on H-bomb and Long Boom 172 

Climate change 308-314; and coal 
320; weakness of international 
agreements 316; and food security 
322; destabilising effect on system 
317; food security, peak oil and 
economic crises 327 

Coca-Cola, outlets in Germany during 
Second World War 269 

Cohen, Robin, Gutkind, Peter, and 
Brazier, Phyllis 344 



Cold War 271; as struggle to divide 

and redivide world 180; economics 

of 180-181 
Collective worker 135 
Collectivisation in USSR, comparison 

with enclosures 158 
Colonialism, before First World 

War, 94-5 
Combined and uneven 

development 222 
Coming Struggle for Power, The (John 

Strachey) 163 
Commercial labour 123; non 

productive for Marx 125 
Commodities, Marx's analysis of 

21-28, 35 
Commodity capital 62; mobility 

of 107 

Communist countries, and competitive 
accumulation 178; during long 
boom, 175-9; economic 
fluctuations in 177-8 

Communist Manifesto (Marx and 
Engels) on revolutionising of forces 
of production 36; and global 
dynamics of capitalism 84 

Competition, and exploitation 37; and 
accumulation 85; military, and 
accumulation 117; and organic 
composition of capital 70-71; blind 
among East Asian "Tigers" 242 

Competitive accumulation 116, 176, 
325; and crisis of USSR 210; and 
relations between states 326-7; and 
carbon energy use 314 

Computerisation in 1990s 235 

Computers, depreciation of 236 

Concentration of capital, under 
modern capitalism 28-29, 78-80, 
303; and slump of 1930s 153; 
during long boom 169; and 
workings of law of value 79-80 

Concentration geographical of 
capitals 264 

Concrete labour 26 

Congo-Zaire 185; civil war, and 
capitalist interests 270 

Congress Party in India, accepts 
liberalisation of economy 220 

Conservative Party, economic policies 
in 1950s and 1960s 162 

Contemporary Capitalism (John 

Strachey) 163 
Continental Illinois bail out 233 
Corey, Lewis 158; on unproductive 
expenditure and boom of 1920s 
146-7, 367 
Counter-cyclical measures 164 
Crash of 2007-9 277-304, 325 
Creative destruction 67,195, 233 
Credit crunch of 2007-8 8, 16, 277, 
290; Marx on credit crunches 66 
Credit money 27, 66 
Credit 27, 87, 61-67; expansion of by 
banks 64; during business cycle 65; 
in US in 1920s 147; and trust 109 
Creditanstalt 149 
Cripps, Francis, on inability to 
understand how economy 
works 192 
Crises 8, 55; inevitability of 58-60; and 
capital accumulation 217; and the 
falling rate of profit 75; role of 
credit in 64; bankruptcies during 
61, 76; and restructuring of capitals 
81; role in imposing law of value 
on enterprise 81; recovery from 61, 
303; and mainstream economic 
theory 55-56, 67; 

underconsumptionist theories of 58; 
of 1937 in US 154; absence of 
during early post-war decades 68; 
after long boom 195-201, 325; in 
Eastern Europe 179; Poland 1970s 
206; and internationalisation of 
system 301; and US hegemony 327 

Crotty, James 185, 294; on financial 
interests and economic 
deterioration 293; on finance and 
real investment 295 

Cultivation and climate change 317 

Cycle of production 62 

Dalits 348 

Davis, Mike, quoted 342-3, 344-5 
Davos, World Economic Forums, 

mood at, 2007-9 277 
Dawes plan 147, 149 
de Brunhoff, Suzanne, on national 

dimension to finance 259 
Dead labour 13, 38, 41, 71, 84 
Debreu, Gerard 43 
Debt economy 280-292, 326 
Debt 263, 278, 291, 300, 326, 



341,372, 377, 378, 383; Third 

World 223, 279; and US boom of 

1990s 279; US household 1952 and 

2006 278; for income groups, 294; 

US banks in 2008, 301; 1929 and 

2008 300 
Decolonisation 182-3 
"Decoupling" 291 
"Deindustrialisation" 332 
"Deleveraging" 290 
Delusion, years of 229-3 1 , 253, 2 8 1-92 
Dependency theories 186-8, weakness 

of 187; conversions of many 

supporters to free markets 219 
Depreciation 37; and rate of profit 75, 

and organic composition of 

capital 76 
Derivatives markets, origins and 

subsequent expansion 284 
Desai, Meghnad, quoted 163-4, 230 
Developmentalist ideology 186-188 
Dialectics of Nature, The (Frederick 

Engels) 82 
Dickens, Charles, quoted 307 
Different configurations of global 

capitals 262-3 
Dimensions of competition 200 
Diminishing returns 69 
"Direct Exploitation", a critique of 

concept 294 
Disciplinary labour 128 
Disproportionally, and development of 

crises 60 
"Disutility" 26 

Dumenil, Gerard and Levy, Dominique 
296; on profit rates, 196-7; on 
neoliberalism and finance 
capital 293 

Dumenil, Gerard 71, 299 

Dunn, Bill, quoted 335-6 

EADS, competition with Boeing 239 

Eastern Europe, and German 
investment 241 

East German, sell off of 
enterprises 233 

Eastern bloc 1945-89 118; 

subordinated to military-industrial 
goals of USSR 180-1; during long 
boom 175-9; in 1990s 225 

Ecological destructiveness of 

capitalism, recognised by Marx and 

Engels 83-84 
Economic cycle, and long boom 178; 

under state capitalism 178 
Economic growth, inadequacy of 

normal measurements 17 
Economic orthodoxy, during long 

boom 162 
Education 334; labour 135; growth of 

state spending on 174 
Effective demand 1 64 
Egypt, under Nasser, not neo-colony 

185; nationalisation 189; economic 

growth 189; Nasser's heirs embrace 

market 220; strikes of 2006 344 
El Alto, workforce 343; uprisings 344 
Electronics industry, pattern of 

employment internationally 335-6 
Elliot, Larry 163; call for greater 

regulation 292 
"Emerging markets", share of global 

investment 221-2; see also Global 

South, Third World 
Empire (Michael Hardt and Toni 

Negri) 93 
Empire State Building 147 
Empires, European before First World 

War 97 

Employment, industrial, in old 

industrial countries 333; cause of 
decline in US manufacturing early 
2000s 262 

Enclosures 39 

End of Empire (John Strachey) 184 

Energy security 319 

Engels, Frederick 35; in Manchester 
12; seeming permanent economic 
depression 88; on rise of capitalist 
state 105; on casual employment 
and dock strike of 1889 341-2; 
foresees disappearance of peasantry 
346; on Bismarck's nationalisation 
1 15; on pollution in Bradford 307 

Enron, bankruptcy 233 

Epstein, Gerald 294 

Equatorial Guinea 185 

Ethiopian invasion of Somalia, US 
backing for 274 

Euromoney, and expansion of finance 
after 1960s 281 

European capitalism, pressures 
on 239-40 

European Community 219 



European Union, combined 
manufacturing output 333 

Exchange rates, and role of state 265; 
and distribution of surplus value 
between capitalist classes 266 

Exchange value 23, 25; in Adam 
Smith 22 

Expenditures that do not contribute to 
accumulation 128-9 see also Waste, 

Explaining the Crisis (Chris Harman) 
14, 16 

Exploitation 28-35; and accumulation 

37; rate of 38; and impact on rate 

of profit 72-73 
Export barrier 204 
Export of capital see Capital exports 
Export oriented development 219; and 

growing debt 219 
Exports, role in German and Japanese 

economies 171 

Family wage 132 
Famine, Irish 40 
Farmers, small, number in 21st 

century 322 
Federal Reserve 8, 149 see also 

Volcker, Paul; Greenspan, Alan; 

Bernanke, Ben 
Fertilisers in USSR 177; and global 

food output 321 
Fetishism of commodities 33, 65; and 

alienation 28 
Feuerbach, Ludwig, on alienation and 

religion 13 
Fiat money 27 
Fictitious accumulation 299 
Fictitious capital 65; and 

intensification of boom- slump 

cycle 66 
Filmer, Deon, study of world 

workforce 331-2 
Finance and "flnancialisation" 

theories, 292-298 
Finance capital 90-92; Hilferding on 

89-92; Lenin on 98; Bukharin on 

98; and interests of productive 

capital 293-4, 297, 298; during 

years of slump and long boom 279 
Finance in recovery of 1980s 283; 

blamed for deterioration of 

system 293-5 

Finance Capital (Rudolf Hilferding) 

Finance, speculation and the crisis, 
65-67; impact on workers 
budgets 279-80 

Financial bubbles, and demand for 
output of real economy 287; in 
Japan late 1980s, reason for 214 

Financial assets, global, and global 
output 1980-2005 278 

Financial capital, national dimension 
to 259 

Financial corporations, US, growth in 

valuation of 278 
Financial crisis, of 1907 92; increased 

frequency of 280; of 2007-8 11 
Financial flows, international flows 

of in 1980s, 1990s and early 

2000s 279 
Financial industry, investment as share 

of total investment, US and 

Britain 295 
Financial institutions 63; and the 

expansion of credit 64 
Financial instruments 286 
Financial labour 123 
Financial protectionism 301-2 
Financial system, origin of 63 
Financial Times, praise for letting 

Lehman Brothers go bust 291 
Financialisation 277-292, as 

temporary motor to world 

economy 289 
Financialisation theory 292-8, 299, 

385, 386 
Fine, Ben, on academicisation of 

Marxism 48; on fog of markets 

caused by financialisation 299 
First World War 89 
Fiscal measures 149, 162 see also 

Fischer, Irving, on problem with word 

"utility" 43; optimism after Wall 

Street Crash 144; monetarist 

explanation for slump 145 
"Flexible production" 261 
Food, and capitalism 320-322; crunch, 

threat of 322; price rises of 2007-8 

320; security 322; production and 

population growth in 20th 

century 320-21 
Ford 284; River Rouge plant 152; 



factories in Germany during Second 
World War 269; closure of 
Dagenham Assembly plant 259 
Ford, Henry 35 

"Fordism", theory of 164; critique 
of 164 

Foreign Direct Investment, 
destinations 183; stocks, 
concentrated in developed 
countries 263; shares of different 
state 263; flows 1982-2006, growth 
of stock 1950-2007 255; not 
mainly on new productive capacity 
261; low proportion of total US 
investment in recent decades 260 

Formal employment 339 

Former USSR, growth in 1990s 225 

Forrester, Viviane quoted 258 

Foster, John Bellamy 81; on peak 
oil 318 

Fragmentation among slum 
dwellers 344-5 

France, fall in industrial production in 
slump 143; economic output 1940s 
to 1970s 161; during long boom 
170; cuts in public expenditure 
240; imperialism in Africa after 
decolonisation 185; conflicting 
interests with US in Africa and 
Middle East 274 

Frankenstein's monster 85 

Free labour, partial negation of 175 

"Freeing" of labour 40 

Freeman, Alan, on unproductive 
labour 127 

Freeman, Richard, figures on global 
workforce, critique of 390 

Friedman, Milton 300; popularity of 
ideas after crisis of mid 1970s 192; 
denounced as Keynesian 194 

Fukuyama, Francis, and "end to 
history" 258 

G8 meeting in Rostock 2007 309 
Galbraith, John Kenneth 202; on 

planning during long boom 168-9 
Garcia, Miguel Angel 49 
General Electric, reliance of finance for 

profits 284-5 
General Motors, and financial profits 

284; in crisis in 2009 290 
General Theory of Employment, 

Interest and Money (John Maynard 
Keynes) 149 

George Bush senior, on New World 
Order 258 

Georgian attack on Ossetia, 2008, 
319; role of US 274 

German capitalism, economic growth 
and profits in 1990s and early 
2000s 240 

German Ideology (Marx and Engels) 
quoted 8 1 

German unification, economic 
effects 239 

Germany, industrial output in 1920s 
144; beginning of crisis in 1928 148; 
fall in industrial production 1929- 
33 143; economic recovery of mid 
and late 1930s 155; seizure of 
western Poland 156; state planning 
during two world wars 115; West 
Germany during long boom 164, 
170; economic output 1947-70 161; 
increase in share of global output 
198; unemployment 1957, 1960 
172; East Germany, crisis of 1953 
179; unification, economic effects 
239, and Croatian Independence 
270; Social Democrat- Green 
government 240; fall in real wages 
240; world's biggest exporter 239 

Ghana 185 

Giddens, Anthony 325 

Gillman, Joseph 146 

Global character of capital's 

destructiveness in 21st century 316 

Global crisis, national solutions to in 
1930s and today 302-3 

Global Gamble, The (Peter Gowan) 293 

Global South 18, 91; in long boom 
182-201; state capitalism and 
economic growth 190; economic 
growth, unevenness of 189; and 
end of long boom 217-225; impact 
of collapse of Keynesian and 
Stalinist economic models 217-8; 
terms of trade 218; negotiations 
with multinationals 222; debt 223; 
inability of poor countries to 
attract investment 222 see also 
Third World, Emerging markets 

"Globalisation" 258, 260, 261, 264, 
266, 267, 277, 281, 298, 301, 325, 



351,378,382; realities and 

myths, 257-262 
Glyn, Andrew 71; (with Sutcliffe) on 

wages as cause of declining profits 

197; on financial crises 280 
GM crops, no solution to global food 

problem 322 
"Golden Age of capitalism" 161, 172, 

182,191, 195, 224, 232, 290, 296, 

304; see also Long boom 
Goldman, Josef and Korba, Karel, 

quoted 177 
Gorbachev, Mikhail 209; on 

stagnation in Soviet economy 202-3 
Government controls on monetary 

flows across borders, 

Government expenditure, and class 

struggle 175 
Gowan, Peter, on clashes between 

finance and productive capital 293 
Gramsci, Antonio, on state as 

"centaur" 111 
Great Depression of 1870s and 1880s 

88; and imperialism 97 
Great Depression of the 1930s 9; see 

also Slump of 1930s 
Great Leap Forward 188 
Greece 218 

Green revolution, and increased food 
output 321; benefits becoming 
exhausted 321-2 

Greenhouse gases 308 

Greenspan, Alan, before US Congress 
8; on "permanence" of economic 
expansion in 1990s 229; and new 
paradigm 229 

Greenwash, not sufficient explanation 
for slow action over climate 
change 310 

Grossman, Henryk, 204; and theory of 
breakdown based on rate of profit 
77-78; criticism of Rosa 
Luxemburg, Bauer and Bukharin 
101; theory connecting imperialism 
and rate of profit 101-2; 
destruction of values through war 
131; interpretation of Marx's 
theory 152 

Grundrisse (Marx) 129 

Guano 82 

Gulf states 183 

Gunder Frank, Andre 190; denies 
being a Marxist 186; version of 
dependency theory 187 

Haber- Bosch process 82 

Hamilton, Clive, debate with George 

Hamilton, Lee 274 
Handloom weavers, livelihoods 

destroyed by advance of 

capitalism 40 
Hansen, Alvin 144, 146 
Hanson, James 309 
Hardt, Michael 331, 333; on 

capitalism not needing imperialism 

93 see also Negri, Toni 
Harris, Nigel, 110; on capitalism and 

peace 92; misinterpretation of 

Bolshevik position 187; "weakening 

of the drive to war" 258 
Harvey, David 112; on "class 

compromise" during long 

boom 163 
Hayashi, Fumio 215 
Hayek, Friedrich August von, 149, 300; 

explanation for slump of 1930s 145, 

151; "roundabout processes" and 

declining profit margins 151; 

guarded praise for Marx on 

crises 67; on inadequacies of 

Bohm-Bawerk's theory of capital 67 
Health and education workers, in 

US 334 

Health provision 334; and variable 
capital 135 

Hedge funds, massive growth 284 

Hegel, Georg Wilhelm Friedrich 13 

Hierarchy of states, cannot be 
stable 270-71 

Hilferding, Rudolf, 165, 279, 298; 
critique of neoclassical economics 
44; analysis of early 20th century 
capitalism 89-91; and tendency of 
rate of profit to fall 77; ambiguities 
in Finance Capital 90; on finance 
capital and war 90; on division of 
functions within capitalist class 
114; minister under Weimar 
Republic 91 see also Organised 

Himmelweit, Susan 71 

Hindu rate of growth 189 



Hobsbawm, Eric, on falling profit rates 

in 19th century 69 
Hobson, J A 292; finance capital and 

imperialism 92; his alternative to 

imperialism 184 
Hodgson, Geoff 48 

Holloway, John, on instant mobility of 

capital 258 
Holy Grail of economics 9, 145 
Hong Kong 242 

Hong Kong and Shanghai Banking 

Corporation 255 
Hoover, Herbert 144 
Horvat, Branko, quoted 178 
Howe, Geoffrey, budget of 1979 193 
Human capital 128 
Hungary, revolution of 1956 207 
Husson, Michel 299 
Hutton, Will 163; and short-termism 

294; on superiority of Japanese 

model 211 

International capitalist class, theory 
of 268 

IMF 230, 231; austerity packages and 
Asian crisis 242; quoted in favour 
of growth of Third World debt, 
1980 220; IMF/World Bank debt 
relief programmes 220 

Immigration controls, reasons for 173 

Imperialism, and end of first Great 
Depression 97; and export of 
capital 98; and rate of profit 102; 
classical theory of 93-99; common 
criticisms of 96; defence of 96-97; 
weaknesses in Lenin's theory 97-98; 
Rosa Luxemburg's theory 99; 
Imperialism and World Economy 
(Nicolai Bukharin) 95; and 
economic development, Lenin's 
position 187; without formal 

Imperialism, the highest stage of 
capitalism (V. I. Lenin) 93 

Imports, of developed countries from 
developing countries 263 

Import-substitutionist model of 
development, 218; see also 
Developmentalist ideology, 
Dependency theories 

Incomes, in late 1920s US 146 

India 17; under Nehru, not neo- 

colony 185; economic growth 
1950-81 189; per capita growth in 
1960s 189; economic stagnation in 
1970s 218; economy in 1990s and 
early 2000s 251-2; rate of 
accumulation since reforms 251; 
employment in industrial sector 
252; informal employment 339; 
fall in real wages in organised 
sector in 1990s 340; pay in 
organised and unorganised sectors 
340; inequality today 251; 
pavement dwellers and working 
class 342-3; agricultural output 
189; much less important to world 
system than China today 251 

Indonesia 185, 242; crisis of 1997-8 
224, 351; anti-Chinese riots in 345 

Industrial countries economic growth 
in 1980s and 1990; against IMF 
forecasts 224 

Industrial capital, relative immobility 

Industrial complexes 109, 259 
Industrial concentration across 

national borders 256 
Industrial firms turn to finance in 

1990s 284 
Inflation, in mid 1970s 191; inflation 

barrier 204; hidden inflation 

Informal employment, in Latin 

America, India, China 339 
Innovation, technical, and long 

boom 165 
Instability, global 325 
Intellectual property rights, and role of 

state 265 
Interdependence between states and 

capitals 112 
Interest rates, raised by Volcker 296; 

cut by Volcker 297; real in 1990s 

and early 2000s 297; and interests 

of finance 287-8; slashed to deal 

with credit crunch 277 
Inter-imperialism rivalries, and Cold 

War 180, 181, 182 
International Energy Agency, and 

"immanent oil crunch" 318 
International Socialism 16 
International trade, growth 

1950-2007 255 



Internationalisation of system and 
crisis of 2008-9 301 

International mergers, acquisitions and 
alliances in 1980s and 1990s 256 

Investment flows, concentrated in 
Triad 263 

Industrial countries' investment from 
1960s to early 2000 (table) 282 

Investment, in US in 1920s 146; global 
1960-2000s 232; uneven and 
spasmodic growth of productive in 
1980s, 1990s and early 2000s 282; 
productive at low level in industrial 
countries in 2000s 287; inflows 
into US and military power 273; to 
stop climate change "not possible" 
313; resistance to low energy 
investments 312 

Iran 183; economy under Shah 185; in 
1979 351 

Iran-Iraq War, role of US in 269 

Iraq Study Group 274 

Iraq War of 2003 319; rationale for 
273; cost of to US 274; refusal of 
France and Germany to back 274 

Iraq 185 

Ireland, under Fianna Fail, not neo- 

colony 185 
Iron law of wages, rejected by Marx 31 
Iron rice bowl 244, 340 
Israel, last example of old style 
colonialism 1 84; attack on 
Lebanon, 2006 274; and US 
imperialism 274, 184 
Italian knitwear industry 261 
Itoh, Makato, and Lapavitsas, Costas, 
finance and productive capitalists 
not two separate groups 298 

Japan, during long boom 170-1; 
industrial output 1940s to 1970s 
161; fixed investment 1946-61 171; 
increase in share of global output 
during long boom 198; growth 
through 1980s 211; crisis of 1990s 
9, 211-217, 325; explanations for 
crisis of 212; rate of profit 212; 
investment 216; crisis compared 
with USSR crisis of late 1980s 217; 
recovery in mid 2000s based on 
exports of equipment to China; car 
firms in the US 256, 261, 281; 

growth of working class 

1951-98 333 
Jayadev, Arjun 294 
Jevons, William Stanley 41; on 

sunspots and economic crises 56 
Jiabao, Wen, quoted on instability of 

Chinese economy 249 
"Just in time" production methods 261 

Kahn, Richard 162 
Karabakh 208 

Karachi, Sunni-Shia and inter-ethnic 
clashes 345 

Kautsky, Karl 82, 292; rejects 

revisionist argument 89; finance 
capital, industrial capital and war 
91-92; ultra-imperialism 92, 185; 
on colonialism and control of 
agrarian parts of world 95; on 
capitalist nationalisation 115 

Keegan, William, 149; criticises Marx 
68; and short-termism 294; on 
superiority of Japanese model 211 

Keynes, John Maynard 10; and 
underconsumptionist theories of 
crisis 59; causes of slump 145; crisis 
of 1930s 150; cautious 162; on 
rentiers 294; liking for version of 
labour theory of value 44-5; 
"Animal spirits" 150; declining 
marginal efficiency of capital 162; 
socialisation of investment 162 

Keynesian measures, seen as reason for 
long boom 161; rarely used in long 
boom 163-4; failure of in late 
1970s 200-1, 297; in Japan in 
1990s 215, 216; limited effect of 
217; as national solutions 301 

Keynesianism 11; as explanation for 
long boom, 163-5; problems with 
195; marginalised after 1970s 193; 
crisis of 191-3; revival during crisis 
of 2007-9 300; left wing illusions in 
303; and neoliberalism today 303; 
bastard 162; radical 11 

Kidron, Mike, on a world of state 
capitalisms 104; on Marx and 
productive and unproductive labour 
127; on waste and organic 
composition of capital 130; on 
Marx's model and rate of profit 130- 
1; on impact of arms spending 165; 



non-underconsumptionist theory of 
effect of arms spending in long boom 
165-6; on British capital exports in 
long boom 183; on subsidy to 
advanced countries from Third 
World through immigration 173 

Kissinger, Henry, on challenges to US 
hegemony 272 

Klein, Naomi on "footloose 
factories" 258 

Koechlin, Tim, on US foreign 

investment 260; on proportion of 
outsourcing in US 262 

Koo, Richard 216 

Korean War 198; reasons for 180, US 

spokesman on 181 
Kosygin, Alexei 203 
Kotz, David, calculations of profit 

rates for mid 2000s 232 
Krugman, Paul, on Japanese crisis of 

1990s 215; on difficulties of 

national states dealing with global 

crisis 301 
Kuron, Jacek, and Modzelewski, 

Karol, on economic crises in Soviet 

type economies 205-6 
Kuznets, Simon 146 
Kwangyang steel complex 242 
Kyoto conference 309 

Labour, socially necessary 41 

Labour costs, socialisation of 174 

Labour power 32, 36, 47; value of 85; 
moral element 31; labour used in 
reproducing 52; supply and 
management of 132; reproduction 
of 132-7; in the long boom 172-5; 
cost of reproduction passed on to 
working class family 174; over- 
intensive exploitation of 315 

Labour productivity, in US, stagnation 
in 1970s 202 

Labour theory of value 44-5, 47, 
imposed on capitalists by 
competitive accumulation 45-6; see 
also Law of value 

Labour time, socially necessary 25, 45, 

Labour, abstract 26 

Labour, concrete 26 

Labour, dequaliflcation of, 52-3 

Labour, skilled, unskilled and 

value 50-3 

Laclau, Ernesto, and Mouffe, 

Landless labourers 347 

Lapavitsas, Costas, on role of central 
banks in financial systems 109; on 
changes in banking system and 
"direct exploitation" 294 

Latin America, populist regimes not 
neo-colonial 185; the lost decade of 
1980s 220; fall in real industrial 
wages in 1980s 340; exports of 
food and raw materials to China 
250; French and Spanish banks 
240, 255; peasant struggles 346 see 
also individual countries 

Law of value 26, 45; operates through 
pressure of capitals on each other 
46; and planning within enterprise 
80; operates on individual capitals 
through time 53; with imperialist 
competition between state capitalist 
trusts 99; and state controlled 
economies 118-119; and giant 
corporations in long boom, 169-70; 
on a world scale 201; under state 
capitalism 201; in USSR 204; and 
welfare and educational 
expenditures 137 

Lawson, Nigel, recognises inevitability 
of crises 67 

Leaks of surplus value from circuit of 
accumulation 130 see also Waste 

Left internationally, attitude to 
USSR 157 

Lehman Brothers, collapse 277 

Lenin, Vladimir 77, 89, 109, 165, 190; 
theory of imperialism 93-95; 
critique of Kautsky on colonialism 
95; quoted parrot fashion on 
imperialism 184; on connection 
between state and capital 106; on 
semi-colonies 185; conditions for a 
"pre-revolutionary crisis" 350 see 
also Imperialism 

Less eligibility 135 

Liberal government (Britain), and 
social reforms 88 

Liberation movements 1 82 

Lifeboat operations and economic 
crises 267 see also Bail outs 

Lifetime of fixed capital, and rate of 



profit 236 
Lisbon Declaration 2002 239 
Living in Britain 2000 334 
Living labour 84; and objectified 

labour 33 
Livingstone, Ken, praise for Gordon 

Brown 303 
Logic of capital and greenhouse 

gases 315 
Logic of states, counterposed to logic 

of capital 1 07 
Long boom 161-192; common 

mistaken explanations 163,165 
Long Term Capital Management hedge 

fund, lifeboat operation 234 
Losses due to telecoms bubble 286 
Lucas, Robert, on failure to understand 

cause of slump of 1930s 9 
Luxemburg, Rosa 77, 89,132; theory 

of imperialism 99-101; luxury 

consumption of capitalist class 126; 

"Anti- Critique" reply to Otto 

Bauer 101 

Macmillan, Harold 349 
Mage, Shane, quoted 164-5 
Mahalla al-Kubra 344 
Maksakovsky, Pavel V, on Marx's 

theory of crisis 59-61 
Malaysia 221, 242; turn to state 

capitalism 185; anti-Chinese 

riots 345 
Mandel, Ernest 197; on absence of 

crises in Soviet economy 202 
Manifesto of the Communist 

International to the Workers of the 

World, The (Leon Trotsky) 116 
Mann, Michael, on limits of 

globalisation 261 
Manual occupations in service 

sector 334 
Manufacturing, centrality in modern 

society 333 
Mao Zedung, death 243; see also China 
Marcuse, Herbert 331 
Marginal efficiency of investment, and 

rate of profit 150 
Marginal output 41; contradiction in 

measuring it for neoclassical 

theory 44 
"Marginal utility" 23, 43 
Marginal value of capital 44 

Marginalist school of economics 9, 23, 
41, 162; see also neoclassical school 

Marketisation 240 

Marshall, Alfred 41; on failure of 
neoclassical theory when it comes 
to real world 10; time as a problem 
to be ignored 42; merits in a labour 
theory of value 44 

Marx, Karl, and Engels, Frederick, 
reject Malthusianism 320; on 
capitalism's destructive effect on 
human interaction with nature 307; 
on productive forces 81 

Marx, Karl, ideas 21-40, 55; on waste 
and organic composition of capital 
129-30; financial profits as paper 
claim on real production 289; on 
role of finance 281; on role of 
credit system and fraud 64; 
discussion on finance in Volume 
Three of Capital 298; on 
accumulation for the sake of 
accumulation 204; on anarchy of 
market and despotism of factory 
80; on capital accumulation and 
growth of "surplus" population 
340; on capitalists as hostile 
brothers 268; on crises of 1846 and 
1857 in Britain 152; on damage to 
agriculture by capitalism 82; on 
division of functions within 
capitalist class 114; on interest rate 
rises to protect value of money 286- 
7; on labour and the natural world 
81-82; on organisation of 
production within enterprise 79; on 
state machine in 19th century 
France 111; on sudden outbreak of 
crisis 148; on the state and 
unproductive expenditures 129; 
refines distinction between 
productive and unproductive 
labour in Capital 122-12; on 
vampire-like character of capitalism 
84; skilled and unskilled labour 50; 
refutation of Say's law 57 

Marx's theory of value, criticisms of 41 

Marxist economic theory, tendency to 
look inwards 15; explanation of 
interwar slump 152-2; failures to 
integrate arms spending into 
analyses 165 



Mass of surplus value, and 

accumulation 118; seeking 

investment in 1980s, 1990s and 

2000s 281 
Matthews, RCO 163, 164 
Maxwell Empire 233 
McCormack, Gavan, on Keynesian 

measures in Japan in 1990s 216 
Menger, Carl 41 
Merchants' capital 107 
Mergers, international as proportion 

of total 260; and jumping national 

state barriers 267 
Mexico 218, 221; crisis of early 

1990s 224 
Michl, Thomas 195, 197 
Middle classes, aspirant in poorer 

countries 221 
Migration, state encouraged during 

long boom 172-3 181; reduces cost 

of reproducing labour power 1 73 
Military competition, in Bukharin's 

theory 96; and economic 

competition 200 
Military expenditure, and long boom 

164; level during boom 165-6; by 

US in 2000s 273; and 


distinction 127-8 
Military hardware, continual role of 268 
Military Keynesianism under Reagan 

272; in 2000s 273 
Military state capitalism 156 
Military-industrial complexes 168 
Mill, John Stuart 67; denies possibility 

of general crisis of overproduction 


Mills, C Wright 331 

Minford, Patrick 230 

Mining disaster in Guangdong, China, 

in 2005 245 
Minsky, moment 64, shifts 283 
Minsky, Hyman 64 
Ministry of International Trade and 

Industry, The (MITI) 171 
Mobutu, Sese Seko 185 
Modzelewski, Karol 204 
Mohun, Simon 126 

Monbiot, George, on Stern Report 313 
Monetarism, and slump 145; takes over 
from Keynesianism 192-3, 297; and 
inflation in Britain 1980s 193; 

failure of in early 1980s 193,201 
"Monetary measures" 149, 162; 

Keynes's scepticism over 370 
Money capital 61,107; mobility of 

107; growth of pools of 283 
Money supply, growth in Britain 

1980s 194 
Money, Marx's account of 27; as 

universal equivalent 27 
Monopolies 90-91; growth of 15; and 

crises, according to Hilferding 91 
Monopoly profits 90 
Monopoly stage of capitalism, in 

Lenin's theory 93-5 
Morales, Evo 346 

Mortgage bubble of early 2000s 286 

Moseley, Fred 126, 195-6, 197; 

calculations of profit rates for mid 
2000s 232 

Mouffe, Chantal, and Laclau, 
Ernesto 349 

MST Brazil's landless workers' 
movement 346 

Multinationals, weight in global 

economy 257; dependence on home 
base for much profitability 260, 
264; dependence on states for trade 
negotiations 265; and role of states 
in aiding accumulation 265; US, 
affiliate sales mainly local 261 see 
also Transnationality index 

Multinational capitals, conflicting 
agenda 268 

Multiplier effect 162 

Multipolarity 274 

Mumbai, textile strike of 1982-3 345; 

Anti-Muslim riots of 1992-3 345 
Mutual Assured Destruction (MAD) 

doctrine 268 

Nasser, Abdul 185 see also Egypt 
Nation states and global crises 301 
National Bureau of Economic 

Research 191 
National Energy Policy, report of 

2001 319 
Nationalisation by former colonies 


NATO 180; expansion into Eastern 

Europe 272 
Nature, and capitalism 307 
Nature of Capitalist Crisis, The (John 



Strachey) 163 
Nazi Germany, state planning 116; 

new investment 155 
Needs of capitals and the needs of 

capitalism 314 
Negri, Toni 93, 331, 333; see also 

Hardt, Michael 
Nehru, Jawaharlal 185 
Nehruvian "socialism" 251 
Neoclassical economists 14, 51; and 

value 26, 41; arguments against 

Marx 41; theory of market 

clearing 42 
Neoclassical school of economics, 1 0, 

14, 22, 23, 26, 47, 53, 144, 369; 

critique of Marx, 41-46; 

contradictions in, 42, 44; failure to 

explain crises 9, 56; Keynes and, 

44-45, 162; theory of value 43; 

see also Marginalist school of 

Neoliberal ideology in Global 

South 221 
"Neoliberal" policies 240 
Neo-populism 347 
Net social wage in 1970s and 1980s 

237-238 (graph) 237 
New classical school 194 
New Deal 154 

New era of 1920s 144; and "new 

paradigm" of 1990s 236 
New imperialism, similarities and 

differences with old imperialism 

270-72, 253 
"New paradigm" 229 
New York Times on military contracts 

and global competitiveness 265 
NGOs 342 

Nixon, Richard, cuts US arms 

spending, ends "Bretton Woods" 

system 198 
Non-productive expenditures, in 

capitalist competition 169; and 

slump of 1930s 155 
Northern Rock, toast of City dinner 

287; nationalised 277 
Notermans, Ton 164; quoted on 

Keynesianism not explaining long 

boom 195 
Nove, Alex, quoted on Soviet 

growth 175 
Nuclear weapons 269 

O'Connor, James, on role of welfare 

benefits for capital 1 74 
O'Hara, Phillip 248 
Obama, Barack, election campaign 

and climate change 313; first 

budget 327 
Offe, ClausllO 
Off-shoring, real role 336 
Oil 183; crisis of 1973-4 184, 191; 

price and Soviet economy 207 
Okishio's theorem 71, 73, theoretical 

refutation of 74-5; empirical 

refutation of 197 
"Old boy" networks 109 
Olympia & York 233 
Ophelimity 43 

Organic composition of capital, in 
Marx, 38; and technical advance 
70; at end of 19th century 102; 
during long boom 168; in 1990s 
234; in China in early 2000s 248 

Organised capitalism, Hilferding's 
theory of 91 

"Outsourcing" overseas, limits to scale 
of 262 

Over-accumulation, under state 

capitalism 179; in USSR 177; over- 
investment in China mid-2000s 248 

Overproduction 61, 178; of telecoms 
bandwidth in 1990s 286; endemic 
according to Rosa Luxemburg 100 

Overseas investment, during Cold 
War 181 

Panic of November 2008 290 

Pareto, Vilfredo 42, 43 

Peak oil 318-20; implication over 
decades 319; does not counter 
climate change 320 

Pearl Harbour 156 

Peasantry 346-9; persistence of in Asia 
and Africa 346; differentiation 
within 347, 348; doing non- 
agricultural labour 332; Chinese 243 

Peasants and Proletarians: the 

struggles of Third World workers 
(Robin Cohen, Peter C W Gutkind, 
Phyllis Brazier) 344 

Pensions, Germany under Bismarck 
88; during long boom 174 

Pentagon, report on global insecurity 
resulting from climate change 328 



Permanent arms economy, as 

explanation for long boom 165- 
168; contradictions in 198-9 

Pigou, Arthur Cecil 145 

Plaza Accord of 1985 214, 266 

Poland, crises of 1970s and 1980s 
206-7; 1980-81, 351; significance 
for whole Eastern bloc 206-7 

Polarisation of classes 87 

"Political capitalists" 115 

Political Economy of Growth, The 
(Paul Baran) 186 

Pollution, in 19th century 307 

Ponzi schemes 64, 283 

Portugal 218 

Posco 242 

Post industrial society, theories of 

Poverty, in China in early 2000s 245; 

in India in 1990s and early 2000s 

252; in USSR in late 1980s 208 
Pravda on unemployment in USSR 208 
Prebisch, Raoul 186 
Precarious jobs, real levels in Western 

Europe, 336-7 
Preobrazhensky, Evgeny 159; on slump 

of 1930s 153; impact of world 

crisis on USSR 158 
Prescott, Edward C, on failure to 

understand cause of slump of 

1930s 9; on Japanese crisis of 

1990s 215 
Price signals and climate change 311 
Price and values 46; deviations from 

values 87 
Primitive accumulation 39-40, 132, 

258-9; and slavery 40; in USSR 

176; China 245 
Primitive communism 21 
Private equity funds 279 
Privatised Keynesianism 288 
Productive and unproductive labour, 

121-6; distinction does not depend 

on physical form of output 121; 

and accumulation 125; and 

commerce 125; Kidron on 127; 

Carchedi on 127 
Productive capital 18, 107; twofold 

character of 108; and state 108; 

relative immobility of 107-8, 335; 

source of funds for banks 65; 

multinational, and rise of 

finance 281 

Productive capitalists and credit 62-4 

Productive forces, can become 
destructive 81 

Productive labour, and dynamic of 
system as whole 125 

Productivity of labour, and rate of 
profit 73; Europe stops catching up 
with US in 1990s 239 

Profit margins, China mid 2000s 248 

Profit rate, theory of tendency to fall, 
Marx on centrality of theory 69; 
and crisis 75-78; countervailing 
tendencies 72; some Marxists 
critical of theory 69; Marxist 
theory after Marx 77; and state 
capitalism 201 

Profit rates, equalisation of 87; falling 
in mid 19th century 88; recovery in 
Britain in 1890s 88; before and 
after First World War 151; from 
1970s to early 2000s 232; fall in, 
and attractiveness of financial 
investment 281; claims that they 
recovered sufficiently in 1990s 299 
and investment, in Japan 171 

Profitability, in China, and low 
international value of Yuan 289; 
and investment in low energy 
production 311-12 

Project for a New American Century 
and US hegemony 272 

Proletarianisation of public sector 
employees 138 

Protectionism 145, 302; Hilferding's 
account of rise of 90 

Proxy wars, typical of present 
period 269 

Public expenditures and class 
struggle 138 

Public works 216 

"Pump priming" and slump of 
1930s 155 

Purchasing Power Parity 250 

Quantitative easing 301 

Raju, Ramalinga, India's "Young 
Entrepreneur of the Year" 287 

Rate of profit, and productivity of 
labour 73 and imperialism 102; 
and investment 76; effect of arms 



expenditure on 131; and turnover 
time of capital 235; under state 
capitalism 117-119; in long boom 
and after 164, 195-7; and end of 
long boom 200; and Japanese crisis 
of 1990s 216; and restructuring 
through crisis 232; in China in 
1990s and early 2000s, estimates 
248; and wages and crisis 76 

Rational expectations theory 194 

Raw material barrier 204 

Raw material, and empire before 
World War One 97; cheapening 
during long boom 165 

RBS Nabisco takeover of late 1980s 279 

Reagan, Ronald, economic policy 194 

Real business cycle theories 56 

Real wages, rise at end of 19th century 
88; see also Wages, United States, 
Germany, Long Boom 

Realist school of international 
relations 103 

Recessions, growth, during long boom 
165; of mid 1970s, explanations 
for 191-2; of 1980s and 1990s 224; 
of 2001-2, 287; panic among 
commentators 230; loss of 
manufacturing jobs 332; of 2008-9 
spread to China and India 291; of 
2008-9 and cutbacks in green 
investments 313-4 

Recycling of oil funds, and growth of 
finance 281 

Reform, economic, in Communist 
countries 176 

Regional character of many 
multinationals 262-3 

Regulation School 164 

Reification 28 

Reiman, Michael 158 

Relative surplus value 34 

"Rentiers" 92, 98, 114; "power of" 
294; "euthanasia of" 162 

Reproduction of labour power and 
productive labour 135-7 

Reserve army of labour 137-8 

Restructuring of capital, in slump, war 
and long boom 164; in 1980s, 
1990s and early 2000s 224, 234-5; 
limited economic effects of 235; 
and working class 335; across 
national borders, and growth of 

finance 281 
Revisionist controversy 89 
Ricardo, David 12, 24, 25, 43, 46; 
development of ideas of Adam 
Smith 22; theory of value 30; gap in 
his theory of value 47; theory of 
falling rate of profit 69; followers 
of 23 

Rio Earth Summit 1992 309 
Robinson, Joan, on support for 

economic orthodoxy by those with 
power 11; on persistence of 
neoclassical theories that have been 
refuted 44; on "Bastard 
Keynesianism" 162; on changed 
message from apologists for 
capitalism 192 
Roosevelt, Franklin D 154 
Roubini, Nouriel 300; quoted 277 
Rows between governments in crisis of 

2008-9 302